Smart Choices For Your Home Equity
Author:
Shelina Verjee
Date: May 1, 2015
Simply put, equity is the difference between the current market
value of your home and what you currently owe on it. Obviously, the
more equity you have the better.
Homeowners choose to take equity out of their homes for many reasons, including: home renovations, debt repayment, down payment, real estate development, or to fund their children’s education.
The good news is, if you do choose to pull equity out of
your home, you have a few options available to you. The problem some people face is
that they don’t fully understand these options. This is not surprising as the loan application
process can often times be confusing and overwhelming.
First, let’s compare getting a second mortgage to refinancing with your current institution.
Here are a few reasons you might choose refinancing over obtaining a second mortgage:
You can keep your current mortgage loan.
The closing costs are much lower.
You can pay off your current mortgage and get a new one,
perhaps lowering your interest rate.
You only have one payment to make each month.
There are more loan choices.
It can be easier to get.
A refinance is a good option if you are happy with your current mortgage arrangement and would prefer to keep it. You will be able to keep the low
interest rate on that loan, while pulling equity out. Also,
with a refinance, your loan term resets with the new loan. Another benefit is that
refinancing is typically less expensive, as most institutions have a
re-advanceable mortgage option. Choosing this route you don’t need to consult a
lawyer and the only fee payable, would be in the instance of an appraisal fee.
Refinancing is also an attractive option if you are able to improve your interest
rate and save money. Sometimes the savings are so dramatic, you are able to pull equity out and in addition, save money on your monthly
mortgage bill. If this is not the case, you are still able to keep the existing mortgage
at the lower rate and remove equity at a new rate, yet still at a lower
cost.
A few things to mention about second mortgages:
Generally difficult to obtain as most banks like to have the first mortgage registered with them as well
Rates are usually higher
Higher fees due to the legal fees associated with registering a second
mortgage
They often have higher rates
Two separate payments at two different institutions
Fewer options regarding length of term
They may not extend you a
line of credit
In most cases, whether you are applying for a first or second mortgage, approval is
required. You will be required to provide your potential lender with the same proof of qualification requested for your initial mortgage. *Some existing
borrowers will waive this if you are refinancing with them, you
have auto payroll or your first mortgage has been less than 2 years.
Second mortgages require proof of income and outstanding
balance on first mortgage, along with proof that your bank has not restricted
you from acquiring a second mortgage. In both cases the bank will re-establish your
credit history and any outstanding debt you may have. This is to ensure that you can
service the additional funds. Remember: Approval is not guaranteed if your credit and debt servicing are not in line.
In the case that these two options don’t work and you are still in
need of equity, you may want to consider a private second mortgage; however, it should be noted that these mortgages include:
Much higher rates
In some cases funds are loaned for short time periods
Much higher fees
Approval is quite easy as private lenders often charge higher rates and fees to hedge their risk.
I welcome your comments and questions. Please feel free to call me at any time to discuss this further.
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