What should I choose?
Below you can see the ups and downs of each product, so you can choose the best option for getting access to your home's equity.
A Cash-out Loan on your first mortgage makes sense when:
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Your current interest rate is close to what the market offers at no cost.
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You are in an adjustable rate right now.
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You have very low credit and need to pay off debts.
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You can't qualify for a second mortgage.
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You are in a modification.
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A Cash-out Loan on your first mortgage doesn't make sense when:
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You have a very low rate on your first mortgage that is fixed.
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You are paying points and fees or burying points into your loan.
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You only need to take out a small amount of money.
What is a Heloc:
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Adjustable rate credit line that allows you to pull equity from your home where you are only charged interest on what you pull from the credit line. Think of a credit card attached to your home.
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You have the option of making interest-only payments.
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The interest only period is typically 10 years.
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After interest-only period ends your loan will switch to a 20 year amortization.
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Rates are normally higher than first mortgages.
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Your ability to draw from the heloc is anywhere from three years to ten years.
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If you draw money and decide you don't need it you can put it back into the credit line, which lowers the balance you are paying interest on.
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If rates go up your interest rate and payment will increase on the amount you currently owe.
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If rates go down you will have a lower rate and payment without having to refinance.
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Your first mortgage stays in place, which means if you have a low rate on your first it won't change.
What is a Heloan:
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Typically a fixed rate second mortgage.
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You get one lump sum at closing.
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Payments are usually principal and interest amortized over 30 years.
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You don't have the ability to draw more money after funding the loan.
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Your principal and interest payment will remain the same whether you make extra principal payments or not.
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If rates go down you will need to refinance in order to drop the rate and payment.
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Your first mortgage stays in place, which means if you have a low rate on your first it won't change.
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Paperwork and the funding timeline is usually only a few weeks.
Why Most Lenders Don't Like Helocs / Heloans:
Many lenders will do everything they can to dissuade you from getting a second mortgage and there is definitely a reason behind it. Luckily for you we specialize in Helocs and Heloans, and love helping our clients choose the right option.
Reasons Lenders don't like Helocs / Heloans:
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1. They don't offer the product: Many large banks and lenders don't have second mortgages, so rather than being upfront they will tell you it makes more sense to refinance your first mortgage (thus losing your super low interest rate).
2. Lenders don't make a lot of money selling second mortgages. The average commission on a loan is around 2% of your loan amount. If you have a $400,000 first mortgage and only want to take out a loan for $150,000, the lender will make about $11,000 if they have you do a new first mortgage for $550,000. If you do a second mortgage they will only make around $3000 in commission. Do you see the seduction in guiding your toward refinancing your first mortgage?
3. Multiple Funded Loans: If you refinance your first mortgage to get cash out and go into a higher rate, there is a likelihood that you will refinance it again when the rates go down. This means that they will not only make money on doing the cash out refinance, but they will also make money when the rates drop and they refinance you again.
4. Easier to hide points and fees: When you do a refinance on your first mortgage you have payoff fees to the old bank, new escrow accounts, a longer timeframe for funding, and title / escrow fees. With all of the items that are getting built into your new loan amount it is hard to track whether you are having points and fees buried into your loan amount. With second mortgage you don't have escrow account, or old payoff demands in most cases, and the process is very quick, so there are a lot less numbers to be confused by which makes it harder to hide fees.
5. Second Mortgages are risky for banks: If you end up defaulting on your home and the home goes into foreclosure the bank in second position (or who holds the second mortgage) has more risk of not being paid off when the home is sold. Ex: You owe $500,000 on your first, and $100,000 on your second, but the home sells for only $550,000, then the first mortgage holder is paid off completely, but the second mortgage holder only receives $50,000 and is out $50,000.
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Let's do the math before you make a decision.
All of these options have great features, but the only way to know is to compare. We always look at each and help you choose the best one based on your needs. If you want to see what your options are click apply now or give us a call so we can start running the numbers.