Second mortgage and home equity loan
Why should you opt for a second mortgage and home equity loan of credit instead of refinancing
Well, if experts are to be believed its better for you.
The question now arises: Why not
1. There is no denying that second mortgage and home equity loan usually have an interest rant that is twice or even three times as high as your first mortgage rate. Thats why, you can refinance instead and keep a very low rate. Moreover, in the long term a second mortgage will just cost you money in interest charges.
2. It is worth pointing that second mortgage and home equity loan lines of credit are designed for mortgage account executives (salespeople) to sell you on using it like a credit card attached to your home. As a matter of fact they will try to convince you to use it over and over again.
3. Theoretically speaking, a refinance loan is better for the equity in your home. But always remember that very few companies will refinance your home at 100% of its value without forcing you to take out a second mortgage. You dont want to use 100% of your equity because that will clearly pinpoint that you no longer have that equity to fall back on in emergency situations.
4. Furthermore, Second Mortgages and Home Equity lines of credit are designed to provide account executives (salespeople) with another tool to sway you into putting another commission in their pocket.
5. According to experts, your equity is a precious thing and should not be used for unnecessary add ons or impulse buys. In case if you dont need it and there is even a slight chance you cant afford it, then dont get a second mortgage to buy it.
The only reason that experts would ever recommend a second mortgage or a home equity line of credit is in a financial crunch. Only when there is no other choice available and you must take out a loan would experts recommend either one of these options.
It is worth noting that a 125% second mortgage and home equity loan(also known as no equity loans, 125 home equity loans and 125 loans) is a second mortgage that requires no equity but the loan gives you an option to borrow up to 125% more than the current combined loan to value (CLTV) ratio of your home. In simple terms, the CLTV is the proportion of more than one loan secured by your home in relation to its value. Always remember that this is different than loan to value (LTV), which only involves the proportion of a single loan in relation to its value.
Wikipedia offers below mentioned examples to help you understand the difference between LTV and CLTV:
Loan To Value:
Property valued at $200,000.00
1st mortgage = $180,000.00
LTV = 90%
Combined Loan To Value:
Property valued at $200,000.00
1st mortgage = $180,000.00
2nd mortgage = $45,000.00
$225,000 Total mortgage balance
CLTV = 112.5%
If experts are to be believed, 125% loans are generally fixed interest rate installment loans, and they are particularly popular among first time home buyers who don't yet have second mortgage and home equity loan for debt consolidation, making home improvements, buying furniture, landscaping, consolidation of auto loans, personal loans and other high-interest loans, paying medical expenses and college tuition. In addition, 125 loans may also be used for mortgage refinancing of a current second mortgage.
Even with the ever-increasing interest rates, a 125% loan offers borrowers lower rates than credit cards and personal loans, and it may also provide substantial tax benefits. When used with utmost ease, 125 home equity loans can be a relatively low-cost way to borrow money for big expenses and debt consolidation.
125% home equity loans are blessing in disguise for those who plan to stay in their home until their property value increases significantly because the home cannot be sold unless the home equity loan is paid off in addition to the first mortgage.
Moreover, as lenders face a higher risk of default due to there being no equity in the home, the interest rates are higher than those of a conventional home equity loan.
In an ideal scenario, 125% home equity loans normally require that the borrower have good credit. Though, even if your credit is less than perfect, you may still be able to qualify for a 125% home equity loan. If not, you have an other option of mortgage refinancing or a standard second mortgage loan once your FICO credit scores improve.
On the other hand, a no income verification home equity loan is a second mortgage loan that does not require you to provide income documentation to qualify for the loan. This type of loan is more than ideal for homeowners who need a home equity loan but have hard to document income.
Most of borrowers with hard to document income are either self-employed or commission based employees. It is worth noting that people who fall under these categories may have high income but have a lot of business related deductions that they write off on their taxes. This is good scenario on the one hand as it minimizes the taxable income and therefore the amount of taxes owed, however, when it comes to availing a home loan it can hurt as most lenders use the average of your last 2 years taxable net income (the amount left after all of your deductions) to judge your income figure for qualifying purposes. This may ultimately lead you to have a debt to income ratio problem if you have a high debt load and therefore keep you from qualifying for the loan. With a no income verification home equity loan, though, your gross income can be used for qualifying purposes as compared to the net income.
Theoretically speaking, in order to qualify for a no income verification home equity loan you will, in majority of cases, need good credit and a high credit score. Always expect to pay a higher rate for this type of loan as compared to a traditional loan in which you have to document your income.
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