Sunday, February 18, 2007

Home Equity Loan

Home Equity Loan

Is a Second Mortgage Right for You?

"Just the facts, ma'am," was Sgt. Joe Friday's famous line from the TV show Dragnet. And while the great detective character used the facts to solve crimes, you can use them to solve the problem of which mortgage to choose. So get ready-here's a "just the facts" overview of the ever-popular second mortgage.

Advantages of home equity loans

Smaller terms, less interest paid. Whether you choose a home equity line of credit, which works like a credit card with an adjustable limit, or a home equity loan, which has a fixed-rate and fixed term, you can generally pay off this smaller loan faster than you would a mortgage. This can help you get through a short-term cash crunch without sacrificing long-term interest dollars.

Easy to close, low fees. Unlike a cash-out refinancing, a home equity line of credit or loan can be closed rather quickly with minimal documentation and low fees. More often than not, your lending institution can use the appraisal from your previous mortgage loan, thereby saving you extra money.

The option to roll it into a first mortgage down the road. Don't forget Newton's law of interest rates: what goes up, must come down. If fixed-rates on 15- or 30- year mortgages drop in the future, you can always refinance that first mortgage and pay off your home equity loan.

There are plenty of options for homeowners in the face of rising interest rates. While the cash-out refinance might not be one of them, a flexible home equity line of credit or a fixed-rate home equity loan might be the best way to tap equity without costing you additional money long-term.

Tapping equity

It's a catch-22 if you've seen the value of your house skyrocket during the last several years. With a boosted property value, you now have plenty of equity to tap for such big-ticket items like home improvements or school tuition payments. Unfortunately, the rise in interest rates has tied your hands.

The solution would be to choose a home equity loan or a home equity line of credit. This could make a nice short-term solution for cash needs, and if you pay it off sooner than later, it could stand to help you in the long run.

Home Equity Loans in a Rising Interest-Rate Environment

If you're a homeowner looking to tap the equity in your home, a cash-out refinance of a 15- or 30- year fixed rate mortgage is generally a first choice. While you'll incur more long-term interest rate charges, you'll also enjoy the benefit of lower monthly payments.

However, during periods of rising interest rates, a cash-out refinance doesn't always look desirable. If you have a terrific rate on your first mortgage, a mortgage refinance would mean that you'd change it in for a higher rate. That choice isn't tempting to most financially responsible homeowners.

Home equity loans: convenient and easy

To pay for such makeover projects as landscaping, painting, upgrading kitchen appliances, or refinishing hardwood floors, a home equity loan is an easy and convenient option. These loans have low closing costs and can be processed quickly. And if you're planning to sell, you can choose an interest-only loan and enjoy inexpensive monthly payments. Since you'll pay off the balance at closing, the out-of-pocket cost of borrowing the money will be minimal. Many homeowners who use a home equity loan to spruce up a house for sale don't make any monthly payments, because the house typically closes before the first installment comes due.

There is one catch, however: Because lenders will not let you borrow money against a house that's already for sale, you need to plan ahead and secure the home equity loan before you list the property. Once you have the cash in hand, you can fix up the house and call the realtor.

Best results for home equity upgrades

Three of the most productive, market-tested places to invest when doing a makeover are:

1. The kitchen: Money spent on kitchen upgrades returns a high yield, often more than dollar-for-dollar. If you can't afford, or don't need, a complete overhaul, concentrate on specifics like new appliances, flooring, and attractive, functional lighting.
2. The bathroom: If you can create another bathroom-or half bath-without disrupting the floor plan, this is a solid investment. When Realtors search for homes on behalf of buyers, they limit the search according to the number of bedrooms and bathrooms. By adding a full or half bath, you may automatically double the number of potential buyers.
3. Paint and trim: A relatively inexpensive approach for a home makeover is to concentrate on freshening it up with a good paint job in neutral colors that have wide aesthetic appeal. Not only does this make the house look better while protecting it from the elements, it also expresses a sense that you take pride in home ownership. Buyers and their building inspectors feel more confident about homes that are well maintained, and a freshly painted home conveys that attitude.