Stop Losing Home Equity!

Stop Losing Home Equity-150x150Losing home equity can and probably will result in a series of serious problems for home owners. The equity in your home represents the part of your home that you actually own. If you lose equity in your home, you can recover it, but it will be more difficult than it was to build it in the first place.

When making monthly mortgage payments, a part of that payment goes towards the loan balance, increasing the equity in your home. At first, a large part of your payment will go towards the interest, but, as time passes, the portion of the payment that goes towards the principal increases, making your equity increase much faster. Home equity is considered an asset, it’s a part of your net worth, and you can use it if you need. Home equity can be used to pay for a second home, medical bills, education, or even retirement.

How Are You Losing Home Equity? What Can You Do About It?

Losing equity can be the result of a bad decision or the result of something that you can’t control. Either way, losing the equity in your home can even result in having to sell your home. Home equity is a powerful financial resource as long as it is used properly. Here’s how you risk equity in your home and a few ways of dealing with these issues:

  • Making major changes to the structure of your home. Transforming a basement into one or two rooms, two bedrooms into one bedroom, the garage into a room, or other major changes might seem like good ideas at the time, and you probably have a good reason for making these changes. Unfortunately, major modifications to a home’s structure or layout can possibly lead to a decrease in your home equity. Home improvement projects must be chosen very carefully if you wish to avoid a sudden decrease in the equity in your home.
  • Doing a cash-out refinance. This type of refinancing will increase the amount that you owe, and you risk ending up owing more than your home is worth. This means that the equity in your home will be reduced drastically, plus you will be paying interest for the cash that you took out.
  • Taking out a home equity loan. Home equity loans use the equity in your home as collateral. The upside is that, if you take out a home equity loan to remodel a kitchen or the bathrooms, the equity in your home may be replaced. Otherwise, your equity will decrease, while the amount that you need to pay back with interest will increase.
  • Not taking care of your home. Parts of your home like the roof and even appliances such as your air conditioner and heater don’t last forever. Not repairing them or replacing them, if needed, will result in a home equity decrease. Part of being a home owner means that you have to maintain your home and make necessary repairs, not only to live comfortably, but to also avoid damaging the equity in your home.
  • Economic crisis. This reason for losing equity is out of your hands and hard to predict, but, even if you are not affected by an economic crisis, the equity in your home will be. The recent housing market crash has resulted in millions of foreclosures, so if you live in a neighborhood where a lot of homes go into foreclosure, the value of your home will have to suffer.
  • Your neighborhood changes. Neighborhoods change all the time, especially after a recession. Your neighborhood might become more accessible to criminals, which will determine many people to move to different areas, and home prices to drop. Unfortunately, there is little you can do in this situation, and the equity in your home will most likely drop, as a result.

Losing home equity can be avoided by not making bad decisions and by resolving the issues that you have power over. In certain situations, there is little that you can do to avoid a drop in your home equity, but even these situations are somewhat preventable. You can recover from a loss in home equity, but it’s always better to prevent a loss than having to build equity again.

Should You Rely on Home Equity When You Retire? Think Again!

Should You Rely on Home Equity When You Retire-Think Again- 150x150The effects of the recent economic crisis can still be felt, especially by home owners, who have found out that the value of their investment has decreased because the housing market hasn’t fully recovered yet. Because most investments have lost some of their value, a large number of home owners felt the need to tap into the equity in their homes in order to have enough money for their retirement plans.

Your home is, most likely your most expensive asset, so tapping into its equity will resolve the financial issues that you might have when retiring, but it might not be the best idea to do so. You can access the equity that you have in your home through a home equity line of credit, a home equity loan, or a reverse mortgage, but you should know that there are some risks associated with this practice.

What Are the Risks of Relying on Home Equity When You Retire?

No matter what your retirement plans are, you will still need a home after you are retired. This means that you might have to find other ways of funding your retirement, ways that are less risky. Tapping into the equity in your home through a home equity loan, line of credit or reverse mortgage can be very expensive, and you can end up spending more than you initially were prepared to, or even lose your home. The interest rates, fees, and closing costs are usually much higher for these types of loans than they are on conventional loans.

If you decide to buy a new home and move out, you may find that you can’t afford a new home because the equity in your current home is very low. An alternative to taking out a second loan which will affect your equity is to downsize your home, which will free up some of the equity that you have built up in your home. By doing this, you will have access to funds that will help you with your retirement plans, while still having a roof over your head.

Planning Ahead is Important

Starting to plan your retirement while you are still young will almost guarantee that your retirement will be problem-free. If you wait until you only have a few years left until retirement, there are many problems that could come up. The economic climate can shift radically in only a couple of years, or even quicker, affecting the housing market and the equity in your home. This makes home equity loans and reverse mortgages a very inefficient way of funding your retirement. Predicting what the economy will look like once you reach your retirement years is close to impossible, so knowing if your home will be worth more or less is anyone’s guess.

Not counting on the equity in your home and planning ahead can save you a lot of trouble and headaches once you retire. Investing in real estate properties, savings plans, and/or stocks is a much better alternative to taking out home equity loans and reverse mortgages, even if you didn’t start at a young age. People who are close to their retirement age can still successfully invest their money wisely, and have enough once they retire.

Relying on home equity when you retire is the least efficient way of coming up with retirement funds. You will most likely end up spending more than you have to, and even put your home at risk by defaulting on a reverse mortgage. Planning ahead and starting to invest at a younger age is something that you should look into, because it is much safer and will ensure that you won’t have to worry about your retirement funds.

Foreclosure with Property Liens and Second Mortgages- Find Out What Happens!

Foreclosure with Property Liens and Second Mortgages-Find Out What Happens- 150x150Many home owners need a second or even a third mortgage in order to cover the price of their home or for repairs and additions. Second mortgages are usually taken out to cover the high price of the home when a single mortgage just doesn’t cut it. Other types of loans, like a home equity loan, are generally taken out when the home needs repairs or if the owner wants to make an addition to the property, like a garage or a pool.

Home owners can also have liens on their properties. When you are sued, for example by a credit card company, for a sum of money and you lose the battle in court, the winning party can file a judgment lien, which will be attached to your property. This article will describe what happens to second mortgages and liens if your home goes into foreclosure.

What is a Second Mortgage and a Lien?

Second mortgages are pretty much just like any other mortgage loan, but they have some advantages and disadvantages of their own. Typically, borrowers will take out a second mortgage in the form of a home equity loan by tapping into home equity. This type of loan is actually a line of credit which is used much like a credit card. The borrower withdraws the amount that he or she needs, which will have to be paid back with interest. Home equity loans are usually used by home owners who wish to make repairs or improvements to their homes.

A lien is created and attached to your property when you lose a lawsuit that involves a sum of money. The property lien gives the creditor the right to repossess your assets in order to satisfy your debt. A judgment lien will prevent you from selling your property until it is removed.

The priority of a lien is determined by the date when it was recorded. Usually, first mortgages are considered first lien, second mortgages are considered second lien, and judgment liens come in third position.

What Happens After Foreclosure?

When a home is foreclosed on, it is important to know who gets paid first. Normally, first mortgages get paid off first after foreclosure. After the foreclosing lender receives his money, the remaining funds will be used to pay off second mortgages and any liens on the property. If the property doesn’t sell for more than what the mortgage loan is worth, then the foreclosing lender gets all the money, and any second mortgages or liens will be wiped out, but the debt won’t be eliminated.

A common mistake that many people make is thinking that second mortgages or liens are paid off once the property is foreclosed on, even if the selling price wasn’t high enough to satisfy these debts. After a foreclosure, the second mortgage and liens are removed from the property title, but the previous owner will still have to pay his or her debt.

The lender that granted you the second mortgage can sue you in order to try to recover his money. However, this will only happen if the debt wasn’t paid off after the foreclosure. Unfortunately, lenders for second mortgages usually don’t receive enough to satisfy your debt after foreclosure, so there is a strong chance that they will sue you. Liens have also been wiped out, but the creditor will still go after you in order to recover the money. Liens that were previously attached to the foreclosed property can still be attached to other real estate property that you own or will own in the future.

Having a second mortgage or lien can create problems even after foreclosure, if they are not paid off. So your best choice is to make sure that you protect yourself by doing some research beforehand, so you will know what to expect if your home is in danger of being foreclosed and you have a second mortgage and liens on it.

Short on Cash? You Still Have Down Payment Options!

Short on Cash-You Still Have Down Payment Options-150x150Taking out a mortgage loan can be very expensive for most home buyers. Between all the fees and the down payment, you will usually have to spend tens of thousands of dollars before you can even move in your new home. The down payment that you make on your purchase will influence how much your monthly payment will be, and also how much you will be spending overall on your mortgage loan. Many times, the down payment will be the only thing standing between you and home ownership. Coming up with a large amount as a down payment can prove to be very difficult for most people, but, fortunately, there are alternatives that can help you.

The obvious thing to do is to take out money from your savings or sell some or all of your investments to come up with the money for the down payment. But sometimes that’s not possible, either because you have no savings or investments, or simply because you don’t find that to be a good option. In this article, you will find out about other down payment options for when you are short on cash.

Government Insured Mortgage Loans

Government backed mortgage loans, like the Federal Housing Administration (FHA) loans, the United States Department of Veterans Affairs (VA) loans, and the loans offered by the United States Department of Agriculture require a very low or no down payment. Besides this advantage, you won’t be required to pay a higher interest rate or Private Mortgage Insurance (PMI) because you didn’t make a down payment or your down payment was too low.

FHA loans are designed to help people with low incomes, who couldn’t afford a conventional mortgage loan. The loan is insured against default by the Federal Housing Administration, and requires a minimum down payment of 3.5 percent, which is significantly lower than the 10 to 20 percent required on conventional loans.

VA loans help current or former military members become home owners much easier. The loans are backed by the United States Department of Veterans Affairs, and require no down payment to be made by the home buyer who qualifies. The interest rate on a VA loan is comparable to the rates on a conventional loan.

USDA rural development loan are designed by the United States Department of Agriculture in order to increase home ownership in rural areas. Like the VA loan, there is no down payment requirement on a USDA loan, but the loan can only be used to purchase property in a rural area.

Take Out Cash from a Retirement Account

In order to come up with money for a down payment, you can also withdraw cash from retirement accounts, such as IRAs or 401(k)s. If this is your first time buying a home, you can withdraw up to $10,000 by yourself or up to $20,000 if you have a joint account with your spouse. Unless you have a Roth IRA, the money that you withdraw will be taxable, but you won’t be required to pay an early withdrawal penalty.

Taking out money from a 401(k) can also be done without paying a penalty, but your employer will have to okay the withdrawal, and the money will have to be returned within 5 years, with interest.

Get Help from Your Family

Many young home buyers receive help from their families when buying a home, especially if it’s the first time. The money must be received in the form of a gift, which can cover part or all of the down payment. However, you will have to provide your lender with proof that the money used for the down payment was a gift, and not a loan. A letter explaining the relationship between the person that gives the money and the person that receives it and the purpose of the amount given as a gift must be sent to the lender before they can approve the gift as a down payment.

Get Help from Your Employer

Some companies and organizations have come up with programs that are designed to help employees become home owners by giving them the money for the down payment as a low interest loan. These types of loans are like a second mortgage, so you will probably have to come up with part of the down payment. This makes them only useful if you want to make a 20 percent down payment and avoid paying for Private Mortgage Insurance.

Use the Equity in Your Home

Only applicable if you are buying a second home, using the equity in your home is a viable option of coming up with the down payment for a new home purchase. Using the equity as a down payment can be done in two ways: by doing a cash-out refinance or by taking out a home equity loan.

As you have read in this article, there are other options that can help you if you’re short on cash and can’t afford to make the large down payment that will make your interest rate lower and help you avoid paying for Private Mortgage Insurance. It would be a shame for the down payment to be the only thing to come between you and buying your dream home, so, hopefully, these alternatives will make becoming a home owner easier for you.

Reverse Mortgages vs. HELOC

Reverse Mortgages vs. HELOC- 150x150Seniors over the age of 62 who wish to borrow money against the equity in their home have two options that they should take into consideration: a reverse mortgage and a home equity line of credit (HELOC). Both of these types of loans have their advantages and, depending on each borrower’s financial situation and intentions, one can prove to be more beneficial than the other. For example, a reverse mortgage may be more expensive due to the high closing costs, but it doesn’t have to be repaid until the borrower dies, or the home is sold. On the other hand, a home equity line of credit is cheaper to get, but will have to be paid back monthly.

Advantages of a Reverse Mortgage

Reverse mortgages are designed for home owners over the age of 62. Borrowers are able to take out a loan against the equity in their home, without having to pay it back until they die, in which case the heirs will have to pay it back, or the home is sold. Reverse mortgages can be paid out in three ways: the whole amount at once, in monthly installments, or as a line of credit. Here are the main advantages that this type of mortgage loan has:

  • Reverse mortgages can be taken out as a lump payment, where the whole amount is received as one payment, monthly payments until the owner dies or sells the home, or as a line of credit which can be used in the same way as a credit card.
  • The borrower won’t need to pay back the reverse mortgage until the home is sold or the owner dies. The home will have to be kept in good condition and the taxes and homeowners insurance will have to be paid on time.
  • Unlike other loans, there are no credit or income requirements that have to be met in order to be granted a reverse mortgage loan.

Advantages of a HELOC

Home equity line of credit loans also allow the borrower to secure a loan against the equity in his or her home. The loan will have to be paid back through monthly mortgage payments, and the home will be used as collateral in the event that the borrower fails to pay back the loan. The main advantages of a HELOC are:

  • The largest advantage that a home equity line of credit has is the lower closing costs. Taking out a loan can be very expensive, especially for older borrowers, so the lower closing costs are very beneficial.
  • Another advantage is that home equity lines of credit don’t have an age requirement, unlike reverse mortgages, which require the borrower to be 62 or older.
  • Lower interest rates are also a reason why a borrower would choose a HELOC over a reverse mortgage. A home equity line of credit will have to be paid back through monthly payments, like any conventional loan, so the interest will be lower than on a reverse mortgage, which will be paid back only after the home is sold or the owner dies.

Both types of loans have advantages, but you should only choose one or the other once you have a clear understanding of everything that is involved in taking out any of these loans. Before taking out a reverse mortgage or a home equity line of credit, you must also understand that, while both loans have their advantages, there are also a few risks involved. Before deciding which loan to go with, make sure that you know what your budget, financial situation, and future plans are.

Want a Big Cash Payout? Don’t Look to Reverse Mortgages!

Looking for a Big Cash Payout- Don't Look to Reverse Mortgages- 150x150One of the most attractive options for seniors who needed a large lump of cash was the standard fixed rate Home Equity Conversion Mortgage Loan (HECM) offered by the Federal Housing Administration (FHA). This type of reverse mortgage was designed to help senior home owners who are in need of a large sum of money especially for things like medical bills.

This type of loan, sometimes in the hundreds of thousands of dollars, is responsible for most defaults associated with reverse mortgages, so the Federal Housing Administration will no longer allow senior borrowers to get a fixed rate on HECM reverse mortgages. The only reverse mortgage loan that will come with a fixed-rate option is the HECM Saver loan, which has a much lower borrowing limit than the standard HECM loan.

What is the Home Equity Conversion Mortgage?

The Home Equity Conversion Mortgage is a type of reverse mortgage insured by the Federal Housing Administration. The HECM reverse mortgage allows senior home owners over the age of 62 to convert the equity in their property to cash. Factors that affect the size of the loan are the borrower’s age and the appraised value of the home.

Unlike conventional loans, which have strict lending requirements, HECM loans are given out without a credit check, and the money doesn’t have to be paid back until the home is sold or the owner dies.

Why Was a Change in Reverse Mortgages Necessary?

The large increase of reverse mortgage defaults has determined the Federal Housing Administration to stop giving out fixed-rate standard HECM loans. Back in 2012, 10 percent of the mortgages insured by the FHA were in default, an 8 percent increase over a decade ago. The FHA is looking at an estimated loss of $2.8 billion, which may force them to ask for a bailout from the federal government.

Reverse mortgages are great for seniors who need quick access to money for medical bills, but sometimes these loans are as high as a few hundred thousand dollars. Borrowers end up spending the whole amount too soon and defaulting, or not having enough money to pay for their property taxes and homeowners insurance.

Reverse mortgages are not for everyone. Seniors who don’t have access to cash, but live in an expensive home can better take advantage of this type of loan. However, reverse mortgages come with high closing fees and high interest rates, so they shouldn’t be your first choice even if you easily qualify. Many seniors took out a reverse mortgage loan because it seemed attractive, but ended up in default because of poor money management and not paying close attention to all that this type of mortgage loan entails.

Reverse mortgages have always been a great choice for a certain type of borrower. Now, with the change to interest rates, they will most likely decrease in popularity. Before going this route, you should look into a conventional loan first, make a careful comparison between your options, making sure that you don’t end up defaulting and having to give up your home.

Need a Second Mortgage? A Home Equity Line of Credit Could Be the Answer!

Need a Second Mortgage-A Home Equity Line of Credit Could Be the Answer-150x150Similar to a credit card, a home equity line of credit could be the answer for home owners who are looking to take out a second mortgage. A home equity line of credit has several unique features and more flexibility than regular home loans, so it might be a better choice for those who need a second mortgage.

What is a Home Equity Line of Credit?

A home equity line of credit (HELOC) gives home owners the possibility of borrowing against the equity in their home. The borrower doesn’t receive the whole loan amount upfront. The lender will establish a line of credit from which the borrower can withdraw, up to the agreed total amount, much like when using a credit card.

The loan is given out based on the borrower’s credit score and equity available in his home. Home equity lines of credit, which are different than home equity loans, usually last for 5 to 10 years in which you can withdraw the amount that you need, for which you will be charged interest. Interest will not be charged for the whole credit line available, but only for the amount that you are actually borrowing. The period in which you can use the money is called a draw period, and it is followed by the repayment period. Repayment periods usually last 10 to 20 years, but some home equity lines of credit require payment at the end of the draw period.

Because a home equity line of credit allows you to withdraw as much as you want, within the set limit, the interest on this type of loan will be calculated daily, rather than monthly.

Benefits of a Home Equity Line of Credit

HELOCs have several strong advantages which should make this type of home loan a good choice for your second mortgage. Here are the most notable:

  • You will be charged interest only on the amount of money that you use, and not the whole credit line amount. The interest, which is tax deductible, will also be lower initially than it would be on a regular mortgage loan. There are, however, a few fees associated with setting up the loan and keeping the line of credit open.
  • Applying for a HELOC is a very simple process and the fees are much lower than on a conventional mortgage loan.
  • Withdrawing funds from a HELOC is as easy as using your own bank account. You can just use the money through a debit card or by writing checks.
  • Home equity lines of credit are also a good option for home owners who wish to make repairs or start a home improvement project, pay for education or medical expenses.

Drawbacks of a Home Equity Line of Credit

Home equity lines of credit are not the perfect loan, so they do have some disadvantages, as well. Here are the ones that you should keep in mind:

  • HELOCs are riskier than adjustable-rate mortgages, meaning that the interest rate can significantly increase over night. Interest rates change during the draw period, unlike ARMs, which give you a fixed rate for at least 5 years.
  • Paying a low interest in the beginning can be a trap for those who don’t have a good budget plan. The interest might be much higher when the time comes to pay off the principle.

As long as you are disciplined, understand what a home equity line of credit involves, and what are its advantages and disadvantages, this type of loan might be a great choice when you need a second mortgage.

Bridge Loan vs. Home Equity Line of Credit

Bridge Loans vs. Home Equity Line of Credit-150x150You’ve decided to move to a new home and you are ready to make an offer. Unfortunately, you need to sell your old home in order to be able to buy the new one. You won’t be able to pay for a new mortgage loan before selling your current home, so you basically have only two options: a bridge loan or a home equity line of credit (HELOC).

Both the bridge loan and the home equity line of credit have advantages and disadvantages. It depends on your individual financial standing if one or the other is right for you. Before deciding on which one to choose, let’s go through a few of their advantages.

Advantages of a Bridge Loan

Bridge loans are short-term loans that you can get in order to pay the down payment on your new home. Lenders are always happy to help you with a bridge loan, if you qualify. The amount of the loan is usually small, around 3 percent of the purchase price. Here are the advantages that you will have if you choose to take out a bridge loan:

  • The bridge loan can be borrowed against the equity in your old home. This is possible while the house is listed, unlike with the home equity line of credit, where the financing must be set up before listing your current home.
  • Not required to make any monthly payments until your current home is sold. This is unlike you would on a home equity line of credit. The balance on the bridge loan, as well as the interest, is paid at the time the old house is sold.

Advantages of a Home Equity Line of Credit (HELOC)

The home equity line of credit is a type of loan where the collateral is the equity in your home. What makes the HELOC different from a conventional mortgage loan is the fact that you are not given the entire borrowed amount up front. After a maximum balance is established, you may borrow amounts up to the maximum, like you would with a credit card. Here are the advantages that the home equity line of credit has:

  • The interest rate and fees are lower than on a bridge loan. The downside, as we mentioned earlier, is that you must take out a home equity line of credit before listing your current home for sale. This means that you should plan ahead if you want to use this type of financing.
  • With this type of loan you also have access to funds in the future, without reapplying. These funds can be used for home improvements or repairs, and other recurring expenses.

At first glance, it seems that the home equity line of credit is the cheapest option when it comes to short-term financing. In the end, your personal finances are the most important factor in determining if a bridge loan or a home equity line of credit is the right choice for you.