Getting a Second
quote programs, and particularly lines of credit, may allow you to use your
real estate equity for everything from debt
consolidation to paying college tuition. You put your own house at risk,
so be realistic when you compare loan amounts, rates, and terms.
Borrow the amount you actually need.
If you still owe $100,000 on your $150,000 house, and your lender uses an 80
percent loan-to-value (LTV) ratio, you could borrow up to $20,000 (80 percent
of your home's appraised value minus the $100,000 you still owe). You may need
the whole amount, but remember that represents a second
mortgage quote payment at a higher interest rate than your original loan,
and you will have to pay off both loans when you sell your house. It's prudent
to take out less than the full amount if you can.
Do your homework when you shop for home equity lines of credit.
These flexible loans vary widely, and some don't charge an annual fee. Compare
the interest, teaser rates and rate caps on every line of credit you consider.
Finally, look for a line of credit that allows you to pay down your principal
every month, instead of making interest-only payments.
When comparing second
mortgage loans, look at short-term and long-term costs.
Short-term costs include origination fees, points and closing costs. (Many lenders
advertise "no-cost" loans, for which you usually pay a half-point
more in interest.) Long-term cost is the total amount of interest you'll pay
over the life of the loan. This is easy to calculate with a fixed-rate loan,
using an amortization chart from your lender. If your loan is adjustable, you'll
need to compare the annual percentage rates (APRs), points, index rates, margins,
lender fees and other loan terms. Lenders are required to give you all this
information when you apply for the loan.
Watch out for negative amortization.
This applies to both second
mortgages and lines of credit. If you have an adjustable-rate second
mortgage or home equity loan, your monthly payment cannot be fixed. As with
any adjustable, your payments should increase when interest rates rise. If your
adjustable program specifies fixed payments, that means the additional interest
is added to the end of your loan, and you'll be expected to pay this extra money
at the end of the loan term. This can also happen with a line of credit. Avoid
both situations by asking your lender to specify your payment terms very clearly
before you commit.
Compare terms with a refinancing/cash-out package before you commit.
Getting a second
mortgage may still be the best route to tapping your home value, but it
pays to consider all your options, including refinancing.