Debt Consolidation
Equity (Cash) Take Out
2nd Mortgage
Secured Line of Credit
Penalty
If you have higher interest loans such as Student loan, car loan, credit car loans you can consolidate the loans to your mortgage with a much lower interest rate. Overall the payments would be lower by consolidating your loans.
Equity (cash) take out is a form refinance in which owner of the property has saved equity in the property. The equity can be either by accumulated principal through the monthly payments, increased market value of the property or the existing equity after the large down payment when property purchased. The equity can be taken out for investment, purchase of a new property, home renovation, business enhancement and expansion or other reasons. When you refinance for equity take out, usually the banks/lenders finance up to 85% or 90% of the price of the market value (appraised value) of the house. An example would clarify the scenario:
Assume the current balance on mortgage is: $300,000.00
The Market Value of your house is: $600,000.00
Based on 85% refinancing of you house
Price your new mortgage can be: $510,000.00
If your new mortgage pays off the balance
of your old mortgage ($300,000) then the
Equity you can take out would be: $210,000.00
Some times you would like to take some equity take out without changing the current mortgage on the house. Usually the current mortgage has the first position in title and that is why it is called “1st Mortgage”.
There could be many reasons why you do not refinance to take equity out but you would like to get a 2nd mortgage. 2nd mortgage does not change or modify your current first mortgage. Your first mortgage can have a low interest rate, or you may have to pay a penalty in case of close term mortgage for your 1st mortgage if you want to refinance. Other reason may be your bank does not qualify you to refinance your current first mortgage.
The 2nd mortgage can be either in the format of Secured Line of Credit or private lender provides 2nd mortgage. The private lender 2nd mortgage is discussed in this section.
2nd mortgage provided by a private lender usually has a 1 year term and can be close or open term. After one year usually the term can be extended. The rate on the 2nd mortgage of this kind usually has a higher interest rate which is usually in the range of 9.5%-15%. This depends on your credit history, income and overall financial status.
The monthly payments are usually interest only. The maximum 2nd mortgage is usually up to 85% of the price of the market value (appraised value) of the house.
An example would clarify the scenario:
Assume the current balance on 1st mortgage is: $300,000.00
The Market Value of your house is: $600,000.00
Based on 85% refinancing of you house
Maximum total of 1st and 2nd mortgage would be: $510,000.00
Then the 2nd mortgage amount would be $210,000.00
And you will have a separate monthly payment for your 2nd mortgage. Assume the rate is 13% and the term is one year.
Total yearly interest = $210,000 * 13% = $27,300
Your 2nd mortgage monthly payments: $27,300 / 12 = $2,275
The 2nd mortgage is paid as interest only in addition to your payments on your first mortgage payments which can be for example $1500.
Your total monthly payments: 1st mortgage payment + 2nd mortgage payment = 1500 + 2,275 = $3,775
Once you pay out the 2nd mortgage the monthly payment is removed from your monthly payments.
In addition to higher interest rate, private lenders usually charge a fee at the beginning and lower the funds advance to you. This fee can be more than 6% of the 2nd mortgage amount.
In the example above the fee would be: 210,000 * 6% = 12,600
And the lender would reduce the amount of fee when advances the money to you. So then the amount of equity take out in the form of 2nd mortgage in the example would be: 210,000 – 12,600 = 197,400. When the term is finished or you would like to pay off the 2nd mortgage you have to return the whole amount of 210,000.
The reason why the rate of the 2nd mortgage is higher and they charge the fee is because to the lender the risk of return of his money is higher. The 2nd mortgage has the 2nd position and in case of foreclosure it is the bank/lender of 1st mortgage who first receives the money back by selling the house.
Secured Line of credit can be as part of your 1st mortgage or 2nd mortgage. It looks very like equity take out but if the content is line of credit you need to pay the interest of your balance per month.
Some times you would like to take some equity take out without changing the current mortgage on the house. Usually the current mortgage has the first position in title and that is why it is called “1st Mortgage”.
There could be many reasons why you do not refinance to take equity out but you would like to get a 2nd mortgage. 2nd mortgage does not change or modify your current first mortgage. Your first mortgage can have a low interest rate, or you may have to pay a penalty in case of close term mortgage for your 1st mortgage if you want to refinance. Other reason may be your bank does not qualify you to refinance your current first mortgage.
The 2nd mortgage can be either in the format of Secured Line of Credit or private lender provides 2nd mortgage. The Secured Line of Credit is discussed in this section.
The advantage of secured line of credit as 2nd mortgage is that usually no fees is charged and also the rate is very low and usually is charged as Prime rate.
The monthly payments are usually interest only. The maximum 2nd mortgage is usually
up to 65% of the price of the market value (appraised value) of the house.
An example would clarify the scenario:
Assume the current balance on 1st mortgage is: $300,000.00
The Market Value of your house is: $600,000.00
Based on 65% refinancing of you house
Maximum total of 1st and 2nd mortgage would be: $390,000.00
Then the 2nd mortgage (as Secured Line of Credit)
amount would be $90,000.00
And you will have a separate monthly payment for your 2nd mortgage. Assume the rate is 5% (Prime = 5%) and you fill up your balance of Secured line of credit to the limit of $90,000 (although as it damages your credit history it is not recommended).
Total yearly interest = $90,000 * 5% = $4,500
Your 2nd mortgage monthly payments: $4,500 / 12 = $375
The 2nd mortgage is paid as interest only in addition to your payments on your first mortgage payments which can be for example $1500.
Your total monthly payments: 1st mortgage payment + 2nd mortgage payment = 1500 + 375 = $1,875
Lower Payments
If you are paying a high amount of monthly payments, refinance can be a solution to reduce your monthly payments.
The alternatives that you can benefit from refinance to reduce your monthly payments would be:
1) To increase your amortization for example from 25 years to 40 years.
2) Get a lower interest rate product for example from fixed close of 6.5% to currently offered 5.39% interest rate.
3) Switch to a variable rate which is usually lower than Prime rate (for example Prime – 0.6%). Usually banks also offer teaser rate which is for a short period of time such as 3, 6 pr 9 months a better rate than what is offered as lower than prime (such as Prime – 2%). Be careful that this rate is temporary and after the period is finished it is back to higher rate (Prime – 0.3%).
In the process of refinance when you switch from one bank to other to refinance, in case your current mortgage is closed term you need to pay penalty to be able to discharge your current mortgage. This penalty can be added to the balance of your mortgage in the new mortgage.
If your mortgage is Closed term and Variable rate the penalty is 3 months interest of your current balance which is almost 3 months mortgage payments. For example if your monthly payments currently is $1,500 your penalty would be 3 x 1500 = $4,500.
If your mortgage is closed and fixed term your penalty would be the greater of 3 months interest of the balance or IRD (Interest Rate Dirrefential). Please contact me or your current bank to give you an estimate of the IRD penalty.
