What is a home equity line (and second mortgage)?

  

• What are home equity lines?   A home equity line is a line of credit that is secured against your home.   It can used for home improvements, pay-off debts, buy a car or boat, or whatever you want.
  
• Length of home equity lines- Most home equity lines run on a 15 year term.  However, depending on the program alternate terms may be available.  Most equity lines are set up the following way:
  
  • Draw Period-  you have a set time period, during which you are allowed to make draws against the line of credit (usually 5 years, but can be longer).  You can pay down your balance and make draws again and again.
    
  • Closed Period- you can no longer make draws, and the equity line essentially turns into a second mortgage where you make equal payments over a set time period (usually 10 years, but can be longer).
    
• Interest Rates on home equity lines- home equity lines generally have variable interest rate.  The interest rate is determined by Prime + a "Number".    The "Number" is usually determined by: 1) credit score or credit grade, 2) loan amount, and 3) amount of equity remaining in the home after the loan.
  
• Fixing Interest Rates on home equity lines- some home equity lines have the added feature of fixing your interest rate (at a pre-set rate) at any time, on a portion or the whole balance of the home equity line.  This can be extremely helpful if interest rates start to rise.
  
• Advantages of Home Equity Lines-  (see Benefits below)

What is a second mortgage?

• What are second mortgages?   Second's are similar to a first mortgages, in that they are a loan secured against the equity in your home.  A second is a lump sum loan (separate from your first mortgage), which you then make equal payments on for a set duration. 
  
• Length of Second Mortgages- Most second's run on a 15 year term.  However, usually you can pick the time period for repayment, which can be 5 years to 30 years.
  
• Interest Rates on Second Mortgages- Second mortgages have a fixed interest rate, that are higher than first mortgage interest rates.   The higher rates are due to the increased risks lenders take by being in the second position.  Interest Rates are usually determined by: a) credit score or credit grade, b) loan amount, and c) amount of equity remaining in the home after the loan.
  
• Advantages of Second Mortgages-  (see Benefits below)

What are the steps involved in applying for a home mortgage?

  
1 - PRE-QUALIFICATION OR LOAN APPLICATION:    Initially we will take your information to determine which mortgage programs and loan amounts you qualify for.  At this time we will pull your preliminary credit report to see where you stand.  If everything looks good and if you desire, we will submit your loan for a credit approval.

2 - CREDIT APPROVAL:  We then submit your application information and a copy of your preliminary credit, in order to get a credit based approval.  Approvals are usually received in 4 to 24 hours (it depends on the loan program).  At this time a conditional approval or denial will come back.  A conditional approval will list documentation conditions that must be provided in order to receive a final approval.  If the loan is denied we then re-evaluate your options, and determine if you would like to submit your loan with a different lender, or for a different program.

3 - REQUEST DOCUMENTATION:   At this point we request any documentation that is necessary to get a final loan approval.  This will include income documentation, an appraisal, a title report, and any other supporting documentation.

4 - AWAITING DOCUMENTATION:   As we receive the supporting documentation. we check for any problems that might arise and request any additional items. 

5 - COMPLETED LOAN PACKAGE SUBMISSION:   Once all the necessary documentation has been received, a loan officer will review the loan package to make sure you are getting the best rate and terms. We then put the loan package together, and submit it to the underwriter for final approval.

6 - FINAL LOAN APPROVAL:   Final approval generally takes anywhere from 24 to 72 hours. All parties are notified of the approval, and of any conditions that must be received before the loan can close. The final loan approval is the beginning of the closing process.

7 - DOCUMENTS ARE DRAWN:   Within 1 to 3 days after the final loan approval. the closing mortgage documents (including the note and deed of trust) are sent to the title company.  At this time you will then go to the title company to sign the mortgage documents.

8 - FUNDING:  Once all parties have signed the loan documents, they are returned to the lender who reviews the closing package. If all the documents have been properly signed and executed, a check will then be issued to fund the loan.

9 - RECORDING TITLE:   When the title company receives the funding check, they record the note and deed of trust at the county recorders office.  The title company will then pay all necessary parties.  And finally your escrow is officially closed!

What are the costs associated with a second mortgage?

 
The costs associated with a second mortgage are:

CLOSING COSTS: Closing Costs are the actual costs required to obtain a second mortgage.  They include any origination fees, points, credit reports, processing fees, appraisal, underwriting, lender inspections, document preparation, flood certification, title fees, and recording fees.  Generally, second mortgage fees are lower than on a first mortgage, due to 1) a smaller loan amount, and 2) a higher interest rate.

If you want to know how much your fees will run, you can ask your lender for a Good Faith Estimate.  The fees in a Good Faith Estimate should be fairly close to the actual costs at the end of the mortgage, any changes or major discrepancies should be adequately explained to you before your mortgage is finalized. 

What are the benefits of a home equity line?

      

• Great for home improvement projects- you spend as you go and use only what you need.  Payments are based only on the outstanding balance of the equity line (what you have withdrawn from the account). 
• Open Line of Credit- purchasing power when you need it, for whatever reason.
• Consolidate your debts- for a lower monthly payment, with a lower interest rate. 
• Get cash out for large ticket items- a car, boat, vacation, etc. 
• Interest may be tax deductible (consult your tax advisor). 
• Increase the value of your property- use the equity line for home improvements. 
  

What are the benefits of a second mortgage?

  

• Consolidate your debts- for a lower monthly payment, with a lower interest rate. 
• Eliminate Private Mortgage Insurance by taking a second mortgage.
• Interest may be tax deductible (consult your tax advisor). 
• Get cash out for large ticket items- a car, boat, vacation, etc. 
• Great for home improvement projects- spend as you go and use only what you need. 
• Increase the value of your property- use the equity line for home improvements. 

Why are interest rates higher on a equity/ 2nd mortgage?

  
Interest rates on equity lines and 2nd mortgages are almost always higher than a first mortgage, due to the increased risk the lender takes.  In event of foreclosure the second mortgage lender can only recover money after the first mortgage has been fully repaid.  In fact sometimes the second mortgage lender can end up getting nothing in a foreclosure.

However, thinking that a second mortgage has a higher rate can be deceptive.  Usually, if you were to borrow the same amount with a first mortgage you would end up having Private Mortgage Insurance.  Private Mortgage Insurance- is an extra payment on top of the first mortgage payment, due to the high loan amount vs. home value.  If you factor in this extra payment a second mortgage can end up being a much better bargain (see the discussion on avoiding PMI below)

Why would I want to use a second mortgage
to avoid private mortgage insurance?

 

What is Mortgage Insurance?  The primary purpose of Mortgage Insurance or Private Mortgage Insurance is to protect the lender from a loss when a buyer cannot make a large down payment.  It can be a monthly, yearly, or one-time charge, however it is usually collected monthly as part of your mortgage payment.

When is Mortgage Insurance Required?  It is required in certain mortgage programs when the first mortgage is more than 75% of the home's value.

Avoiding Mortgage Insurance.  The negative aspect of PMI is that it is not tax deductible.  If you were to take a second mortgage to avoid PMI you can end up with the same monthly payment, and interest paid on the second mortgage is tax deductible*.  In addition you will be building equity in your home faster than with just a first mortgage.  A second mortgage is usually for a shorter term (usually fifteen years or less), and more of each monthly payment goes towards the payment of the principle loan balance.

*consult your tax advisor

How is my credit rating determined?

 
Credit rating is synonymous with your credit score, a.k.a. a "FICO" score.  There are three main credit reporting agencies: Equifax, TransUnion, and Experian, and each has a different mathematical way to compute your score.  FICO scores above 620 are generally viewed as good credit.  Some programs require excellent credit which is usually a score of 660 or higher. Anything below 620 score is taken on a case by case basis, but will normally fall into the non-conventional mortgage market or have to qualify for an FHA or VA program.

Here are some general methods to improve your FICO score: 1) make all your payments on time, 2) establish a home mortgage and pay it on time, will improve your score, 3) close excess accounts, too many open credit lines reduce your score, 4) pay down maxed out credit lines, maxed out lines tend to lower your score, and 5) keep longer established accounts, they show financial stability and can increase your score.

How do I determine my monthly payments?

Your monthly payment will consist of at least two components: principal & interest.   If you want to have escrow accounts (property taxes and homeowners insurance) included in your payments, then the yearly amounts need to be divided by 12 and added to your mortgage payment.  To calculate your monthly mortgage payment use our Monthly Payment Calculator.    

Please note some loans require monthly mortgage insurance premiums to be added to the payment.   If you would like to determine the exact monthly mortgage insurance payment required in your circumstances, then contact one of our qualified loan officers at Velocityloan.com

How do I know what my house is worth?

  
It is difficult to determine an exact home value without having the property appraised by a qualified professional (Registered or Certified State Real Estate Appraiser).  You can determine a good ballpark figure, by finding out what similar properties (same size and quality)  in your neighborhood have sold for recently.  

Your tax assessed value can be a good base figure, or a past appraisal on your house can give you a good idea.  But remember, the true value of the property can only be determined by an appraisal, and all other methods are good for estimation purposes only.