2. Most people start the mortgage shopping process by comparing different mortgage companies interest rates on the 30 year fixed rate mortgage. This is a safe bet and 9 out 10 times should be the way that most people go about picking the right mortgage for them. Its a way that people will know exactly what their payment will be until the day they pay it off. No surprises with that one. It usually comes down to picking the right bank or getting referred to somebody that your friends went with.

3. What makes the home equity loan so appealing is first off, the closing costs are very low. The average closing costs on a 30 year fixed mortgage not including state tax fees or lawyer fees is in the $2k-$3k range. This usually covers the appraisal, title insurance, and any underwriting costs. This will usually be the same across the board regardless of what mortgage company you go with. These are all third party fees and its hard to get around those.

4. The normal closing costs on a home equity line of credit are usually less than $1k. There is something about the wording that is involved in the paperwork when doing a home equity loan that considers it more of a lien on the property than an actual mortgage. I will say though that it differs from state to state but I saw times when I was a mortgage banker that we had a system called an “automatic value module” that searched a database of recent home prices in the area you were looking to buy or refinance. If the value of the home came back at what we needed to make the loan work, we would not even have to do an appraisal on the home. This would save the cost of an appraisal (about $350) plus the week it took for the appraisal to go out and get it back. This did not happen all of the time, but since it was considered a second lien on the property it was considered a little bit riskier. Whatever mortgage company held the mortgage note on that property would get paid second in the case of a foreclosure on the property. There was less title work that had to be done since the property was already under the property owners name.

5. With closing costs being about $1k-$2k less than a normal fixed rate mortgage you are already starting to save money. The only trick to this scenario is trying to find a mortgage company that will do a first lien home equity loan. ( Find some at:) Most mortgage companies stopped doing second mortgages all together because they are losing their butts of trying to sell these loans on the secondary market. This is because of falling real estate values across the country and with people owing more than what their house is worth.

6. Let’s say that you can find a mortgage company that will do a home equity loan as a first lien for you. You are going to save money on the closing costs already. The only downside that I can think of is that a HELOC is considered a adjustable rate mortgage. The interest rate is never fixed on the loan. While this might make some people nervous a bout the whole concept of not knowing what your mortgage payment will be from month to month it is no need to get anxious.

7. As of September 2008, interest rates on Home Equity Loans are around 5.25%. Interest rates on 30 year fixed rate mortgages are around 6.25% with no points. Its easy to see that you are already saving about 1% on the rate alone.

8. What is a neat feature of the home equity loan is that it gives you a lot of flexibility with your monthly payments. Your HELOC’s payment would be based off of a interest only payment. Let’s say you took a 30 year mortgage of $100k at 6.25%. Your payment would be $615.72. A HELOC at 6.25% on $100k would be $520. The difference between the two is about $95. This means that only $95 of your fixed payment would be going to the mortgage every month for probably the first 3 years of the loan. You might as well just consider it a interest only loan in the first place. This extra $95 could come in handy for extra bills, rising fuel prices, or to start a savings account. If you do not need the extra money then put it back towards the loan and pay it down.

9. What also is cool about a HELOC is that if you do put extra money towards the loan your payment the very next month will go down accordingly. Many people think that if they make a one time larger payment towards their 30 year mortgage that their payment will go down. This is not true. Your payment stays the same until the day its paid off with a 30 year fixed loan. On a HELOC your payment will go lower even if you put $1 more towards your interest only payment. This is great because you can see you hard work and determination going to paying off your mortgage. By doing this you also leave your self an option to borrow back against the loan in the future. On a 30 year fixed you can never re-borrow witout having to go through the whole refinance process again. You will have to pay closing costs all over again. The HELOC will let you borrow up to whatever space you have available with a quick call to your bank saving you thousands of dollars in closing costs all over again.

10. The benefits of buying a home with a Home Equity Loan are lower closing costs. Lower interest rates. Greater flexibility with your monthly payments. The option to pay more towards the loan and see you monthly payment slowly go down. If you pay down some of the balance you can always borrow it back saving your self a lot of money in future closing costs. It might be hard finding this first lien home equity line of  credit. Many mortgage companies stopped doing second mortgage type loans because they are hard to sell on the secondary mortgage market. If you can find one you will probably have to put down at least a 10% down payment and have credit scores over 720. You will not have to pay any PMI (private mortgage insurance) which will also save you more money on your mortgage payment if you cannot come up with a 20% down payment.

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The Top 10 Reasons You Should Buy A Home With A Home Equity Line Of Credit (HELOC)

2. If you currently own a home and hopefully you have owned it for awhile you could try opening up a home equity line of credit(HELOC). To open up a home equity loan you will need to have some equity in your home to be able to borrow against it. To determine how much you can borrow against your home you will need to call up a mortgage company and ask them what are their guidelines with their home equity loans. Many mortgage companies nowadays will only do a home equity loan up to 90% of the value of the home. The bank might have some guidelines that say you have credit scores over 700 and have not missed a mortgage payment in the last twelve months. Each mortgage company has their own guidelines but you want to make sure that you find the one that can give you the most help. Some mortgage companies and banks will not even do a home equity loan or a second mortgage anymore due to deteriorating home values across the United States. If you call 5 different mortgage companies, credit unions, or banks and none can help you then its going to be the same with all mortgage companies.

3. Let’s stay on the bright side of things and say that you have found a mortgage lender that is going to help you out. As an example ou currently have a first mortgage that goes up to 60% of the value of the home leaving you with 40% equity in the home. The mortgage company says they can give you a home equity loan up to 90% LTV (loan to value). You will want to take the home equity loan up to the full 90% even if you do not need the full amount. The reason is because you just never know how much you might need in the future and with home values dropping everywhere you might not be able to refinance this home equity loan in the future. Better safe than sorry.

4. A home equity loan typically has low closing costs and are usually in the couple of hundred dollars to do. This is much cheaper than redoing your first mortgage which closing costs on first mortgages range in the $3k-$4k area. Home equity loans will also close in a faster time. Most mortgage companies can have your home equity line of credit done and closed in sometimes a week. A first mortgage will take anywhere from 2-4 weeks to close mainly because there is more title work to do.

5. So how does paying off your credit card debt with a home equity loan improve your financial situation? Let’s say you have $30k in credit card debt spread over 3 different credit cards with an average interest rate of 19%. Credit cards are based on a variable rate and are calculated much differently. You are required to make a 4% monthly payment to the credit card companies because now they want their money back. So $30k x 4% = $1,200 a month in total monthly payments you need to make to them. The sad thing is that if you never use your credit card again and just make the $1,200 a month payment it will take you 16.7 years to pay off the entire credit card balance and you will pay $19,469 in interest on that $30k. So the $30k you racked up in credit card debt really costs you $49,469 over a 17 year period (you can figure this out with a credit card payoff calculator). Not good news.

6. This is where the home equity loan comes in to save you. Even if you make decent money between you and your spouse it just seems that everything you make is going right out the door to cover the credit card bills. The sad thing is that the $1,200 payment is barely even making a dent in your balances. More than likely you need to use your credit cards every month anyways to make the payments because you do not get paid in time. Your credit score might be low on your credit report but we are going to assume you can at least make your monthly credit card minimum payments.

7. The home equity loan is a 30 year adjustable loan (very few are fixed) where the first 10 years of the loan are a interest only payment period. After the 10th year it turns into a 20 year principal and interest loan whre you are required to start paying the line of credit back. The interest rates for the home equity loans are based off of the prime rate which is set forth by The Federal Reserve. Right now the prime rate is low and you can find home equity loan rates in the 5%-7% range depending on your credit score, loan to value, and some other factors. A home equity loan is also called a second mortgage. Second mortgage rates are typically higher than first mortgage rates due to a number of different factors but being a risky loan is one of the top reasons. You can borrow up to the maximum amount at any time. Some banks give you a checkbook for your HELOC and you use it just like your personal checking account. At the end of the month you get a bill showing what you used it for and a new monthly payment. Since the home equity loan is considered a lien against the home you get to write any interest that you pay on the loan off on your taxes.

8. Going back to our scenario with the $30k in credit card debt. You are able to get the HELOC with a $50k maximum line of credit but you only need the $30k to pay off the credit card debt. Remember that there is another $50k – $30k available to use at any time for you, but you only pay on what you borrow. So you are only going to be paying on the $30k. Let’s say you get approved on the HELOC for 6%. This is a lot better then the 19% you were paying on your credit card. Right off the get go you are saving 13% in interest. Now you are also getting a bigger tax write off too. Good news everywhere.

9. Your monthly mortgage payment on the $30k at 6% is $150 interest only. A easy way to figure this out is take the balance $30k x mortgage rate of 6% = $1800 which is your yearly required interest payments, than divide by 12 which equals $150. So now  you go from paying $1,200 a month on your credit cards to $150 on your HELOC. This saves you $1,200 – $150 = $1,050 a month in payments. This is exciting news for you. Over a year that is $1,050 x 12 months = $12,600 in cash back in your pocket. Imagine how fast you could have $50k saved up in a bank account or retirement account now. You can more than afford the $150 payment. If you do not put more than $1 on top of your home equity loan payment in 10 years the balance will be the same $30k because you were only paying interest. Now you have to start paying it back on a 20 year amortization schedule which will be $214.93 a month. Still very affordable.

10. The best thing you could probably do is if you are accustomed to making the $1,200 payment a month to the credit cards than you should make that payment to the HELOC. Now every single month the balance will drop by $1,200 – $150= $1,050. In a year you could pay down $12,600 of the balance. If you made the $1,200 payment every month you would have the home equity loan paid off in 2.23 years. This is much better than paying interest on credit cards for 17 years. What is also neat about the HELOC is that your payment re-adjusts every month to the new payment. Let’s say you get the balance down to $20k. Your required interest only mortgage payment will be just $100 a month. As you can see, it pays to pay more. More of your payment will be going to the balance. If you get into a tight situation one month than don’t make the larger payment but pay in cash. Once things pick back or resume withe the larger payments. You will see that your credit score wis going to jump up considerable within two months after paying the credit cards off. Do not close out your credit cards. You will need to keep them open because you have all of that time showing payments being made. Cut the credit cards up and never use them again, just do not call the bank and say you want to close them. You need to show a history of payments on those credit cards. There are two things that everybody should do at this point. Never close your home equity loan. Most home equity loans do not have a yearly servicing fee to keep it open so just keep it there. You never know when you might need that money for an emergency like a job loss or medical expenses, etc. The second is to not see this extra $1,200 a month of money as a reason to go out and buy more stuff and rack up the credit card debt again. Be responsible with your money and start paying it back. This is your opportunity to pay it back faster and you better take it and do the right thing.

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The Top 10 Reasons Why Paying Off Credit Card Debt With A Home Equity Loan (HELOC) Is Good

2. First mortgage rates are determined by a couple different things but the main factor is the 10 Year Treasury Bond. This is a moving index that changes every day on the stock market. In the current mortgage mess that is going on right now in the year of 2008 rates are going to be factored with more than just the 10 Year T-Bond. Banks and investment firms are putting another factor into their equations and it is called risk.

3. Risk is what the banks are doing when they give you money to buy or refinance your home. In many cases the banks are giving you hundreds of thousands of dollars. In return the banks want you to just make your payments back to them with interest. Over the span of 30 years they can collect a lot of interest and in most cases the average home owner will pay what they bought their home for in interest.

4. Second mortgage rates are determined from the prime rate. This is what The Federal Reserve lends money to banks with. The prime rate moves when the Federal Reserve gets together and decides to raise or lower them based on current economic conditions. They are pretty much wrong all the time but that is another story. The prime rate was as low as 1% in 2002. What this means is that you could get a second mortgage or HELOC with a interest rate of about 3%. Most banks would take what they borrow the money for and add 2% on top of that number. That number would represent their profit margin. Actually during that time period and as of the past 6 months interest rates for the time being are lower than a 30 year fixed rate mortgage.

5. Typically interest rates on a second mortgage are going to be higher than the first mortgage because of that risk factor again. Mortgage companies determine the rates they are going to give you for a second mortgage based on a couple different factors. Those factors are the prime rate, your loan to value (LTV), credit score, and debt to income ratio (DTI).

6. The biggest factors are the prime rate, loan to value, andyour credit score. When mortgage companies were doing second mortgages and HELOC’s all the time (not so much anymore) they would look at your mortgage application and go through their rate sheets with all of its adjustments. Typically for evey 5% loan to value you went up your interest rate would get .50% added onto it. As an example let’s say your loan to value was 90% and the par rate for that day was 7% at 80% LTV. This means you would get hit with two rate adjustments of .50% and the interest rate you would be offered would be an adjustable 8% (if it was a HELOC its adjustable). As you can see if you went up to 100% LTV you would now be paying 9%. The loan to value would be the first adjustment, the next would be your credit score. At one time you could get a second mortgage with a credit score as low as 620 but the majority of lenders needed to see a 660 and up. To get a 2nd mortgage at a 660-680 credit score you would only be able to do a loan up to 90% LTV. A 680-720 credit score would let you do a loan up to 95% LTV anda score over 720 you could have done a second mortgage up to 100% LTV. Having a credit score between 660-680 would have a 1% interest rate adjustment, 680-720 will have .5% rate adjustment and a score over 720 would not be any additional costs. What this means for example is lets say you have a credit score of of 672 you could only get a second mortgage up to 90% LTV. The interest rate offered to you would be 7% (prime rate at the time) + 1% (rate adjustment for LTV) + 1% (for the credit score) = 9%.

7. The mortgage company can offer you a lower interest rate but you would have to buy down the interest rate or what’s commonly called buying down the rate. Depending on the mortgage banker they already know that you are so mortgage rate focused that you would not care if you were charged another $800 in costs. The mortgage broker can move the numbers around any which way you want as long as they cover the costs that are covered on their rate sheet.

8. Going back to that risk factor thing again. This is the newest one to enter the second mortgage market. What happens in the case of a foreclosure is whatever bank holds the first lien position on the house would get paid first at short sale or a auction. It is not uncommon to see two different banks holding mortgage notes for two different loans. This can make for quite the predicament because neither want to lose out. What happens the majority of the time is the bank that holds the second mortgage is going to get shafted and will probably take a big loss in the principal amount that was lent. Both banks have to agree to the terms of the sale and some will not let the other bank sell until the loss the one is taking is not as bad as the others.

9. Many banks have stopped doing second mortgages or home equity lines of credit all together because of all of the homes going into foreclosure. Since the banks do not want to get shafted when it comes to trying to get paid at a foreclosure they have to charge higher interest rates. The ones that are still doing them have tightened up their guidelines all together and it is really hard to get one. Depending on the bank you are working with be prepared to pay interest rates 2%-4% higher than the going prime rate even if you have perfect credit and a low loan to value. It’s just the nature of the beast.

10. With this new risk factor going on in the mortgage industry these are pretty much going to be standard practices from now on. The United States financial industry is in shambles and the only way the banks are going to be able to raise working capital faster is by raising interest rates to cover all fo their losses in the real estate, credit, and mortgage arenas.

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The Top 10 Reasons Second Mortgage Rates Are Usually Higher Than First Mortgage Rates

2. The banks are the one’s that set the guidelines for anybody who does business with them. Since a mortgage broker does not lend you the money (the bank does that the mortgage broker works with) they were told that they would not be honoring anymore fixed second mortgages or HELOC’s. This lead to a mad dash from all of the smaller companies to close these loans so they could sell them to the bank before the deadline or they would not be able to close.

3. What lead to this rush was a realization that the housing bubble had finally burst. Home owners now owed more than what their house was worth and property values were dropping quickly. Most people that took out a second mortgage did so for home improvements, credit card bills, weddings, etc. The majority of people rolled in a bunch of debts so they could have one mortgage payment that they could write stuff off on their taxes instead of a bunch of smaller payments. This usually saved them payments on their overall monthly payments but all this did was increase people’s appetite to spend more and use their home as an ATM.

4. Now the mortgage companies see the dip in home prices and most could do second mortgages up to 100% of the value of their home. Appraisals were coming in much lower now than even just six months before so they could not give them another second mortgage or even be able to roll a first and second mortgage into one. Mortgage companies look at the loan to value (LTV) of the house and if both combined to over 100% there was nothing they could do.

5. When home owners started defaulting on their home loans and went into foreclosure what happens is if there is a first and second mortgage on the property the company that has the first mortgage would get paid back first in the event of a short sale or auction. The mortgage company that holds the second lien position on the house would get whatever proceeds that were left over…if any. Many received none because there was no way that the house was going to sell for what the home appraised for when they did the loan.

6. With no money coming in to cover the foreclosures the banks just said they are no longer going to do second mortgages up to 95% or above of the homes value. Many large banks like Chase, Bank Of America, and Wells Fargo might still do them because they would hold onto the mortgage note and service it themselves. What these large companies did was shut off the companies that sold the mortgage notes to them, ie the mortgage brokers. What happens is all of the mortgage notes the mortgage broker would have closed on get sold to the larger bank (that actually funded the loan) in a bundle. The banks would accept the notes in one packet and start servicing the loan and collect your interest. The banks left a lot of trust to the mortgage brokers to do the right thing (and most did) but it meant that some mortgages could squeeze through without going over thoroughly. The banks decided it would be in their best interest to get rid of all the small companies selling them the second mortgages and do it all in house.

7. The banks do not know how much farther the real estate market is going to go down. Of course the National Realtors Association says that home prices are leveling off but you should not believe that for a second. Remember that Realtors work on commission and they want to reassure you that you are getting a good deal. If you are not in a rush to buy a home right now, try and wait until about June of 2009 before you start looking to buy. You will probably save another 8%-15% on the purchase price of the home.

8. The banks have realized that home prices have not leveled off yet so they are not in a rush to do the second mortgages yet. What would happen if they did is let’s say that they start doing second mortgages back up to 95% or 100% of the value of the home. People default on the loans and the home goes into foreclosure. The banks should know that the real estate market is probably going to drop another 5%-15% across the country until June 2009 or when home prices get back to what they were before 9/11 happened. So now the bank would be holding onto the note for a second mortgage on a home that is worth 5%-10% less than what it could be sold for. This would leave them with a 5%-10% loss on the money that they lent. Banks are not in business to lose money and this is a losing scenario.

9. The banks are now trying to fight back to all of the mortgage brokers and correspondent lenders (Correspondent lender is a lender that is big enough to fund the home loans but typically borrows from a line of credit they have with a larger bank like Countrywide and sells that bank the mortgage note. A great example of a correspondent lender is Quicken Loans. They do not keep any of the loans and sell them after closing to the larger bank for a quick profit and releasing themselves of the note and the responsibility of the property in case of foreclosure) to take these second mortgages back. It’s becoming a game of hot potato because nobody wants these second mortgages and the finger is being pointed everywhere.

10. Instead of doing second mortgages for every body the banks have decided to only let certain borrowers take out a HELOC. The qualifications have gone up and many banks now will only let you take a second mortgage up to 80% LTV and you need to have over 700 credit scores with no mortgage lates in the last 12 months. Many also make you open up a checking account with them and you have to have to your payments automatically withdrawn. This is a safer bet for the banks because now they can handle the down turn in the market for a little longer and not have to worry about losing out in case of foreclosure or anymore short sales. If you are in the market for a second mortgage or HELOC good luck finding one. You should start out with your local bank and then call up a big bank like Chase or Bank Of America to see what they can offer.

Post from: The Top 10 Reasons

The Top 10 Reasons Mortgage Companies Stopped Doing Second Mortgages

2. During the height of the refinance boom some mortgage companies were letting home owners take loans up to 125% of the value of their home. Everybody thought that this was going to be okay because real estate always goes up and more than likely the home would be worth more than what you would owe on them in the next year or so. It was easy for banks to think that way because almost every home in America doubled in so called value over a 3 year span. So in the example above you could take out a loan for $175,000 x 125% = $218,750 – $125,000(Current Mortgage Balance)=$93,750. That’s $43,750 more than what you could if you could just go up to 100% of the value. The banks thought this was a good idea because now they could collect more interest on more lent money. Dumb.

3. Not to get off track but many people took out 80/20 loans to get away from private mortgage insurance(PMI- Which is dumb as hell). So you take out a conventional 30 year fixed rate mortgage up to 80% of the value of the home and a Home Equity Loan to cover the other 20%.

4. The Home Equity Loan gives home owners a lot of flexibility in what they want to do with their payments. From this point on I’m going to assume that you have equity in your home and are not purchasing a home so you see the benefits of having a HELOC. The only thing with a HELOC is that it as an adjustable rate loan. Every time you hear on the news that The Federal Reserve raised or lower rates HELOC’s are affected. Your payment will move up or down every month that The Fed does this. Some banks offer fixed HELOC’s but they are few and far between. The adjustable interest on the home equity loan is the trade off for the flexibility of the loan. It’s not a bad thing if you use the HELOC correctly.

5. The payments on a home equity loan are based on a 30 year amortization schedule with the first ten years being a interest only period. The cool thing is that you only pay interest on what you borrow. As an example lets say that you want to put some new cabinets in your kitchen but you do not have all the money that its going to take to pay for it. You go to your bank and open up a HELOC and lets say they give you this line of credit up to 100% of the value of the home. I like the example above where you have $50k of equity. You need $8k to finish the kitchen and that’s it. Let’s say that your interest rate is 5% (it will probably be higher but use this as an example). Your payment the next month is $8,000 x 5% = $33. That is a pretty cheap payment for $8k. The $33 is just interest so if you only make a payment of $33 then your balance will be the same until year 10. At year 10 the HELOC changes into a 20 year loan where you have to pay down the balance.

6. So now you have a balance of $8k so what does it mean to have a $50k HELOC. Think of it as a credit card limit. You can borrow up to $50k at any time. Some banks even give you checks to write them from your account. Others will make you call them and they will overnight a check. So in our example you have $42k to use at any time. I am by NO MEANS saying that you should go write a check for a Cadillac Escalade or something you do not need (this is what a lot of home owners did during the mortgage mess) but its nice to know if you have an emergency and need quick cash.

7. The cabinets are installed and the kitchen is complete. You were able to get the $8k you needed in the first place to pay for it. What do you do now? Do you keep the money and put it in the bank(OK Idea)? Do you go out and blow the $8k on a vacation(Bad Idea)? Or do you pay back the $8k towards the HELOC? PAY IT BACK. No need to pay interest on something that you earmarked in the first place. Remember, if things get tight you can always take that money back out at anytime. Debt = Bad.

8. The HELOC should be used for the right things such as an emergency, home improvements, college tuition’s and oh what the heck you can even say weddings. We all now how long weddings take to plan so if you don’t have the money right there but will get it by the end of the ceremony you might as well use it. Instead of making your kids get student loans take money out of your HELOC and pay their tuition with it. Since a home equity line of credit is a loan against your house you get to write off the interest that you pay. You don’t get to write it all off but every bit helps.

9. If you are an investor and like to buy stocks or flip homes than you need a HELOC. This should almost be considered cash. You can tap it at any time and if a great deal comes around you do not want it to pass you buy. Get out the checks for your HELOC and write a check that day.

10. One of the coolest features of a home equity line of credit is a little trick you can do to help pay down your bills or the balance on your mortgage. There are a couple companies that do this and they call it Money Merge Accounts. Its their way of selling you into a program to do what I can show you for free. I’m going to write another post about it in the future that’s more in depth but here’s the basics. On the HELOC you pay little interest on big amounts. Example: $125k 30 Year Fixed Mortgage at 6% has $750 monthly payments were $625 of that is interest. So only $125 goes to pay down the loan. Over one year your balance will go down $125 x 12 months = $1500. So lets say one month you write a check from your HELOC for $2k towards one months payment on your first mortgage. Your payment is $750 so $1250 went on top of the loan to pay down the first mortgage balance. That $2k is now a balance on your HELOC where your payment (I’ll use 7%) is $2000 x 7% = $140 interest in one year / 12 months = $12. So what you effectively did now was transfer a lot of interest from your first mortgage to your second mortgage. You basically are going to double the amount of principle you pay off on the mortgage every year. Which in the long run will save you in the tens of thousands of dollars. When you get your HELOC bill the next month all you have to pay is the $12 but you should pay $750. This might be confusing and I’ll work on a post in the future so its more detailed. All in all the HELOC gives you a ton of flexibility with your finances and can be considered your emergency fund in tough times.

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The Top 10 Reasons Why Home Equity Loans (HELOC) Are Good To Have