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10 Big second mortgage mistakes to stay away from

Posted on: 05th Oct, 2005 04:38 am
Getting and managing a second mortgage may not sound tough if you've already taken out a loan against your home. However, there are loopholes that you should avoid. So, prior to getting a second loan, take a look at the 10 big mistakes that can make things worse for you.

1. Not being aware of Home equity loans and HELOCs

Home equity loans and HELOCs are both second mortgages taken out against your home equity. Home Equity loans can be either fixed or adjustable, while HELOCs are only available as adjustable rate loans. In addition, Home equity loans are one-time loans, while HELOCs are revolving lines of credit.

Moreover, the purposes of these loans are different. For example, a home equity loan is designed to help you consolidate debts or make home improvements, but when it comes to fulfilling your periodic needs, HELOC is better. All you need is a basic understanding of both the loans to make them work for you.

2. Taking out a large credit line

Think twice before you take out a large credit line. How much your line of credit is for will be taken into account when you apply for other loan and can possibly get rejected too.

Most often your credit line payments are determined on the basis of your total credit liability even though you have not taken out any money from your line of credit. A large credit line implies large payments that may affect your ability to repay the second mortgage as well as other loans.

3. Not shopping enough for the best loan

You may decide to take out the loan from the bank where you have a checking account. But if you wish to get the best loan for your needs, look one that can give you some benefits and help you save due to lower interest rates.

Therefore you should shop around and get quotes from other lenders/brokers to see what else you can get before comparing and choosing the best one.

4. Not asking for a Good Faith Estimate

It's your lender's responsibility to provide you with a Good Faith estimate (GFE) after you apply. A GFE provides you with a breakdown of all the fees involved so you can be assured that you will not be paying any hidden fees or costs. So, even if your lender forgets, just remind them that you are yet to receive a GFE.

5. Thinking a second mortgage costs you less

You may have to pay less on a second mortgage than if you are managing a credit card. To find out which is better, you need to consider the interest rates on credit cards and compare it with the rate on a second mortgage after taking into account the tax deduction. For example, if you have taken a HELOC. Its effective rate is:

Effective rate = rate* (1 - tax bracket)

If your tax bracket is 30% and the actual rate on the credit line is 15%, then,
Effective rate is = 15% * (1 - 0.3) = 15% * 0.7 = 10.5%

Now, if your credit card interest rate is higher than 10.5%, then the second mortgage will be cheaper to manage.

6. Going for second mortgage when you plan to refinance

Lenders may not allow a first mortgage refinance when you already have a second loan on the same property. They may look at the combined loan amount even if you refinance only the first loan.

Lenders may either ask you to pay off both the loans completely or pay down the second loan when you refinance. However, they may allow you to keep the second loan if you can get a subordination agreement from the second mortgage lender.

This agreement ensures that the second loan has a lower priority with respect to the new refinance loan. Thus, you need to consult the lender offering the refinance loan as to whether they will allow you to keep the second mortgage. You can also compare the rates on the refinance and the second loan to find out if it makes sense to keep the second mortgage and refinance the first or refinance both into a single loan.

7. Being unaware of second mortgage tax deduction

Your home equity loan/HELOC may not be fully tax-deductible and you can't always trust the lender to give you the correct information. If you want to take advantage of any tax deductions, you should consult a tax advisor or a CPA.

8. Use Heloc to pay off credit card debts

If you have taken out a HELOC to pay off credit card debts, make sure that you don't completely exhaust the available credit limit. You may find it hard to make the payments on time.

9. Being unaware of a prepayment penalty

There may be a prepayment penalty clause in the second mortgage agreement that could cost you a lot of money if you try to sell or refinance your home and pay off your mortgage early.

10. Not knowing about life caps

Usually home equity lines of credit have life caps where the interest rate can go up much higher than you expected. So, plan your budget and keep a cash reserve if you need it.

No matter why you need money, getting a second mortgage can be a good way to get it. But in order to avoid a second mortgage trap, you should know what you're getting into before you take out a home equity loan or a HELOC.

I don't think any lender would agree to give you a remodelling loan for a home that you have purchased for only a year. I think you should wait for a year and then apply for a remodelling loan.
Posted on: 16th Feb, 2009 11:34 pm
well, guest, i don't agree with your stance about the length of ownership, but i will have to say that it's a very difficult thing to do to obtain a loan that will allow for construction of anything to an existing structure.

what you may want to do, anonymous, is to check with your local community bank and/or credit union(s), as this is the type of lending that they'll probably be best at. a lot, of course, depends on how much equity you have in the home; but national lenders have, for the most part, departed from this type of lending.
Posted on: 17th Feb, 2009 09:04 am
hi, i get a commercial line of credit from the bank for 36.5k now the bank call for it , i own a house with about 35k equity should i refinance are a second mortgage
Posted on: 19th Feb, 2009 07:11 pm
Hi Hubert,

I think a refinance is a better option than a second mortgage. If you take a second mortgage, you will be liable to pay two mortgages. But if you refinance the mortgage at a lower rate, you will have to pay for a single mortgage and the payments can also be low.

Posted on: 19th Feb, 2009 09:37 pm
if i purchased my home for 120,000 and my balance on my
first mortgage is 97,000 can i get a 2nd mortgage. I'm not
sure how all of that works. I'm needing to borrow a 100,000
is that possible. i have excellent credit
Posted on: 20th Feb, 2009 06:38 am
Hi jericafox,

Yes, you can try getting a second mortgage. As your credit is excellent, I don't think you will face much problem in getting a mortgage. You can contact few lenders and get to know what kind of rates and terms you will be receiving from them. This will give you a fair idea whether you will be able to afford the loan or not.

You can also speak to the lenders of this community and get a no obligation free consultation from them. This will help you in knowing the rates and terms that you can expect to get.

Posted on: 22nd Feb, 2009 10:21 pm
jericafox, you didn't state when you purchased your home. if it was a recent purchase, then your equity position isn't going to be strong enough for you to obtain a loan for $100,000. credit is obviously most important in the borrowing process, but mortgage lenders are restricted by property values, regardless of credit standing.

what you need to determine is the value of your home now. that will provide you with the information you need to see if a loan would be available to you as you described.
Posted on: 23rd Feb, 2009 06:41 am
We recently refinanced our home. The value is appraised at 960K and our mortgage is 417K - with a 30K cash out. We are in desperate need of cash. Would you advice taking out a 2nd mortgage, and is that even an option? We do have good credit but with the markets we can't sell stocks and we need to consolidate some debt to make it through this recession.
Posted on: 03rd Mar, 2009 12:55 pm
based on the value you describe, you'd be able to obtain a second mortgage, if all else is equal (income, debt, etc.). i assume that you're trying to consolidate in this situation. that would certainly seem to be in your favor, if the overall effect is to reduce your overall obligations.
Posted on: 03rd Mar, 2009 12:57 pm
Would i contact someone like you? Please advise.
Posted on: 04th Mar, 2009 07:49 am
you certainly may do so.
Posted on: 04th Mar, 2009 07:52 am
I own a moblie home its value is 60,000 and I wan to get money out of it with the title. How much would to intrest be if I would to get a loan for 10,000?
Posted on: 04th Mar, 2009 09:50 am
Posted on: 04th Mar, 2009 09:57 am
Please tell me how a va loan works. My fico is 729. Is this type of loan used for lower priced housing? I want a loan which includes Prin, Int, Taxes, and Ins. Please Help. Thank-You, Pat
Posted on: 21st Apr, 2009 08:38 pm
pat, with a va loan, you may borrow as much as 100% of the purchase price of the home. "lower priced" housing is a difficult term to decipher, as it varies depending on location. but a va loan is not specifically designed for lower priced homes, but is limited in general - that is, no jumbo loan amounts.

if you're a veteran, and you have your certificate of eligibility and your dd214, you'd qualify (it would seem). of course, qualifying also requires that you have sufficient income in addition to your credit status.
Posted on: 22nd Apr, 2009 06:59 am
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