Using Home Equity to Finance Summer Projects

Summertime is right around the corner. And with the right amount of cash on hand we can take full advantage of travel and vacations; complete a long list of to-do projects around the house, or pay for all those amenities, gadgets, and toys that make summer more enjoyable.

But playing in the sun and surf usually shrinks our income rather than plumping it up, so the season always presents us with a challenging contradiction: Do we sacrifice our summer pleasures or wipe out our savings? Rather than succumb to the urge to depend on credit card debt to finance the fun and play now but pay later, it may be a better strategy to tap into the equity that is still hibernating within your home. That way you can have your cake and eat it too, by increasing your cash flow without necessarily putting your budget or savings at risk.

For some consumers, taking out a home equity loan or doing a mortgage refinance will actually increase their net savings. For example, if you are caught in an expensive interest-only or adjustable rate mortgage you can bail out by refinancing into a safer and less expensive 30-year fixed rate mortgage. Those who are getting walloped by credit card interest can take out a less expensive home equity loan as a good way to consolidate and pay off those double-digit credit card rates.

Just calculate the average of the rates you�re paying now and compare that to available home equity or refinance rates to determine your savings. If you are paying 16 percent in credit card interest and can qualify for an 8 percent equity loan, for example, you�ll automatically save 8 percent. And if you have an adjustable rate mortgage about to reset, you can refinance to a fixed rate in time to avoid the spike in your monthly installments. You�ll pay some closing costs to refinance, but you can also calculate your savings rate on those by dividing your costs by the amount you�ll save each month. For instance, if you can save $100 a month by refinancing and the closing costs to do so are $1,500, it will take you 15 months to break even. Each month after that you�ll gain net savings of $100. Stay in your home for 10 more years and you�ll save about $12,000.

To generate cash through home equity for kitchen upgrades, tuition, a new car, or a European vacation � in other words, for whatever expenses you foresee � you have at least three choices:

Cash-Out Refinance

The "cash-out" refinance is a great option for those homeowners who have lots of home equity. If you owe $150,000 on your mortgage but your property is worth $350,000, for example, you can pay off the existing $150,000 by refinancing. But a cash-out refinance means you borrow more than $150,000, using the surplus for whatever you want.

Borrow $250,000, for instance, and you�ll walk away with an extra $100,000. Your monthly payments will increase, but the benefits may justify the added expense � especially if you invest the money your borrow wisely or refinance into a better mortgage in the process (such as switching from an ARM or negative amortization loan into a 30-year fixed rate mortgage).

Home Equity Loan (or 2nd Mortgage)

Home equity loans or 2nd mortgages typically carry higher interest rates than first mortgages, but have little or no closing fees. And while refinancing can take a month or more to finalize, applications for home equity loans are simple and loans can usually be funded within a week or two. These are a good choice if you have major expenses � such as opening a business, renovating your home, or buying a vacation property � and you want to stretch repayment over a period of several years.

Home Equity Line of Credit (HELOC)

The HELOC is an open-ended mortgage that behaves much like a credit card. You borrow what you want, when you want it, and if you only pay interest on the amount you borrow. Typically there are no fees to open a HELOC, and if you choose not to use it you won�t be charged any interest. Use it and then pay it back and your credit limit goes back up so you can borrow it again if you want to. HELOC loans, like credit cards, are convenient for short-term financing of smaller purchases. But the interest you pay on your HELOC will likely be considerably less than typical credit card interest rates.

By: Jeff Hammerberg

Your Home Equity Mortgage Loan Could Use a Fix

If you have a home equity line of credit or home equity loan with an adjustable rate, consider fixing your rate and payment while rates are still low.

Many borrowers have home equity lines of credit (HELOCs) to consolidate debt and avoid bad credit. Others took out second mortgages to pay for medical emergencies, home improvements, or other large purchases. While using debt secured by your home is often the cheapest financing available, and far superior to credit card debt, you should keep an eye on your interest rate.

What Rate Do You Pay For Your Home Equity Line of Credit? Most HELOCs carry rates based on the prime rate and may change every month. If you have bad credit, the rate on your home equity loan could be several points higher than the prime rate, and you have little protection against rate and payment increases.

Can This Problem Be Fixed? Check your loan documents. Some HELOCs and ARM second mortgages allow you to fix your interest rate at one or more times during the life of the loan. If your loan features this option, consider exercising it before rates go up.

Other Options for Fixing a Bad Credit Home Equity Loan include wrapping the line of credit or second mortgage into a new first mortgage, or refinancing your ARM home equity loan or HELOC with a fixed rate second mortgage. Replacing your existing first and second mortgage with a new first mortgage makes sense if you can get a better rate and terms than you have now.

Check Your Documents. Home Equity lines often carry a penalty of about $500 if you pay them off within three years of the origination date. Terms for a bad credit home equity loan may be more restrictive than that. Check your loan documents before applying for a home equity refinance to avoid expensive surprises. If you have a penalty, check with your current lender. Some are willing to waive the penalty if you refinance through them.

By Gina Pogol
Mortgage Credit Problems Columnist

Home Equity and Bad Credit: The Right Loan for the Right Reason

There are 5 common reasons for taking a home equity mortgage loan. If you have bad credit, it may make sense to finance debt with a home equity loan. Or not. Borrowers with poor credit must be extremely careful to take a home equity loan for the right reasons. Here are common reasons for refinancing and the pros and cons of each.

Reason #1: Debt Consolidation

Rates on credit cards for those with bad credit can be higher than 25% and fees can be even more. There may be many advantages to debt consolidation with a home equity loan, including lower payments and interest rates, and tax advantages. Remember that if you can't make the payments you could lose your home in foreclosure proceedings. Credit counseling or bankruptcy might be a better option if you don't have the income to make the payment on a home equity loan.

Reason #2: Renovation Expense

If your credit is bad but your income is good it could make financial sense to renovate (especially if you need to sell a home in a bad market) and a home equity loan could be a lowest cost way to go. If you could be financially derailed by unexpected problems (for instance you don't have health insurance) think twice before taking on debt secured by your home.

Reason #3: Educational Expenses

Investing in your family's future and financing its education expenses can pay off in the long run. If you have bad credit, it may be easier and cheaper to get a secured home equity loan than an unsecured student loan from a finance company. And there may be tax advantages as well. There are many sources of financial aid available. Try scholarships and grants first before attaching debt to your house.

Reason #4: Car Purchase

If you have bad credit and can make the payments, an equity line might get you a better rate than an auto finance company. With a bad credit history you must be careful with purchases on credit; make sure that you aren't taking a 30 year loan to buy a car you'll have for 5 years.

Reason #5: Second Home Purchase

Taking a home equity loan can be a sensible way of getting a down payment for a second home or investment property. You have a better chance of being approved for your purchase, and of getting a lower rate, if you come up with a substantial down payment. If you don't make your payments you could lose two homes instead of just one.

If you have bad credit there can be many good reasons to take out a home equity mortgage loan. It's crucial that you look honestly at your situation and take the right loan for the right reason.

By Gina Pogol
Mortgage Credit Problems Columnist

Home Equity Loans: Tax Deductible or Not?

"Consult your tax advisor." That little disclaimer shows up in nearly every ad for a mortgage lending product. But who actually does that? Here are the reasons why home equity interest expense is sometimes tax deductible, and sometimes not, and why you might try consulting that tax guy after all.

Borrowers with bad credit are always being told to consolidate their debt with home equity financing. And this can be a great solution for many reasons--lowering payments, improving rates, affording home improvement, paying for emergencies, etc. And one benefit almost always mentioned is the tax deductibility of the interest.

Home Equity Interest: Is it on Your Schedule?

Your Schedule A, that is. That's where you put your mortgage interest if you itemize your deductions. If you are a borrower with bad credit, a low income, or a less expensive home, government data suggests that you are less likely to deduct your interest than a high income borrower with a million dollar mortgage. Taxpayers who have smaller mortgages and therefore pay less interest, or those who have a higher standard deduction, such as a head of household, may not reap the benefit of deducting interest. A home equity loan might still make sense, but deducting the interest is not a consideration.

How High is Too High for Home Equity Deduction?

The IRS restricts the deductibility of interest on a home equity loan to a loan amount of $100,000. This limit applies whether the $100,000 is a single loan against your main home, or the total of a combination of loans against your first and second homes.

But Wait, There's Less....

The $100,000 limit on your home equity mortgage deduction may not apply to you. If the total amount of loans against your home is greater than the home's value, you only get to deduct interest on loan balances that don't exceed the total value of your home. For example, Homeowner A has a house worth $200,000, and a $160,000 mortgage against it. If he was to get approved for and take a $100,000 second mortgage, the total mortgages against the property would be $260,000. Only the interest on the first $200,000 is deductible. The interest on the excess $60,000 is not.

But Wait, There's More......

If you are using the home equity loan for home improvement, take the above and throw it out the window. You will probably get to deduct the mortgage interest.

Now that you're thoroughly confused, you can see why most lenders ask you to "consult your tax advisor."

By Gina Pogol
Mortgage Credit Problems Columnist

Buying Your First Home - Tips For First Time Buyers

The interest rates are at their lowest for more than 30 years. Lenders who want to secure your mortgage over a long term are keen to win your custom and offer particularly good deals for first time buyers. Sellers too are always keen to secure a deal with a first time buyer because your purchase does not depend on anyone else and therefore the likelihood of the sale going through is very high. If you set up an agreement in principle With a mortgage lender before you start viewing properties you are in effect a cash buyer and are in an excellent bargaining position.

The first step to buying your first property is to know how much you can borrow. Lenders usually agree to three times the first income or if you are buying as part of a couple, three times the first income plus the second income, or two and half times the joint income. However it is sometimes possible to borrow four or five times your salary. You can approach lenders yourself or you can enlist help from a financial adviser. This is usually a free service to you and by using someone who is experienced you may find the process less stressful.

When you know how much you can borrow be sure you can afford the mortgage repayments, the costs involved in buying a property and the costs of running a property.

Costs you will need to budget for when buying your first property include a deposit (normally 10% payable when the contracts are exchanged), stamp duty (1% if the property is between �125,001-�250,000; below this figure there is no stamp duty), a valuation fee to your lender (variable depending on what type of valuation you choose), your legal fees including local searches and disbursements (around �500) and moving costs (variable depending on whether you use a removal company or are able to move yourself). Once you are in your new home you are likely to need some funds for furnishings and decoration.

You will also need to consider the costs of owning a home. These vary according to your home and area. Common bills are council tax, maintenance, buildings and contents insurance, amenities (to include electric, gas, water and telephone). If the property is a flat or apartment then there may be service charges. Also insurances such as accident, sickness, life are available though not obligatory.

By Susy Copus
Published: 7/15/2006

Buying New Homes Vs. Buying Existing Homes

According to Lawrence Yun, senior economist for the National Association of Realtors (NAR), the 2007 market puts buyers of homes at an "overwhelming advantage". However, the NAR is also predicting that 2008 sales will increase due to a slow down in new home construction that is helping to balance out the market place. For those who are considering buying in this current real estate climate, the decision of whether to invest in newly built homes, or existing ones, can be pretty confusing. With fewer brand new homes available on the market, maybe you�ll get a better deal on a slightly older house. But how can you make an informed decision? The basic factors you want to keep in mind for the homes you consider are upkeep, neighborhood, structure, and cost.

Upkeep of Homes on the Market

Many first time homeowners assume that a new house requires less maintenance. While that should be the case, the reality is that the craftsmanship of the homes can have more impact than their age. A solidly built 10-year-old home may not have the same issues as a shoddily made, cookie-cutter home in new community. How can you tell? Find a good inspector to look at any homes you consider. Wood fixtures, appliances and overall structural integrity need to pass muster before you make any serious offers.

Neighborhood of Homes on the Market

Older homes often surpass new construction in desirability if you want to live in an historic or popular area. If you are in love with a certain part of town, or committed to sending your children to a specific school district, new home construction may not be an option. Also, if you really love a specific architectural style, you might find you are better able to afford older homes in that style than to locate or have a newer one built. You may also find that you can afford a newer and bigger home, but in a less desirable area of town. You will need to weigh your priorities. This leads to the look and design of homes in general.

Structure of Homes on the Market

For buyers at the middle or lower end of the house buying spectrum, the trend for new home construction tends to lean towards deed restricted communities, small lots, and "cookie-cutter" style homes. There are some benefits here for first time homebuyers who wouldn�t otherwise be able to afford a new house. The down sides are that deed restricted communities place significant limits on what you can do to your property. Some tend to have very little space between homes. And appreciation of your home will be impacted by how well your neighbors maintain their property. Of course, you may also find this in buying an existing home in one of those communities. You will need to decide how important an established community or large yard is to your life. Just as you will need to evaluate the physical and aesthetic structure of the homes you consider.

Cost of Homes on the Market

Your final determination will be cost. You may be able to find almost new, or slightly older homes, in great shape. Or you may save $20,000 on an older home and get stuck replacing the roof the next year. Your best bet is to get a good home inspection, evaluate the quality of other homes in the area, and weigh your options and priorities. As with most aspects of evaluating homes for sale, your decision is personal and completely based on your needs and desires.

By John Harris
Published: 7/26/2007

Buying A Home With No Money Down

Buying a home with no money down has become easier than ever. Unfortunately, it has also become more necessary than ever, thanks to ever-falling savings rates. With that in mind I would like to respectfully suggest that if you need to buy your home with no money down, you may have a more general problem with your finances that needs to be worked on. In any case, there are times when it makes sense to have a lower or non-existent down payment, so let's look at four ways to accomplish this.

1. Have the seller finance part of the deal. For example, if you can get a mortgage loan for 90% of the purchase price, and the seller lets you make payments on a second mortgage note for the other 10%, you have a no money down deal - especially if the seller pays closing costs. Some sellers will be willing to do this if you pay full price or close to it. The lenders on the first mortgage may not agree to this, though, so ask them.

2. Get the seller to finance it all. Sellers need at least some cash, so how can they provide all the financing and still get cash? By creating two notes and selling one. Let's look at an example.

Suppose the seller is asking $220,000 for his home. He expects to get about $210,000 for it, and he needs at least $150,000 in cash to pay off his $130,000 mortgage and have a little left over. You offer him $240,000 for the home, in the form of two mortgage notes. The first is for $200,000 and the second for $40,000. As part of the deal, you have arranged for a "note buyer" to buy the first from him for $170,000. Now he has $170,000 at closing, plus you are making payments to him on the other $40,000, meaning he got the $210,000 he expected out of the sale. Of course, you had to overpay for the home due to the steep discounting ($30,000) on the sale of the first note, and you will have payments on both. In other words, there are only certain times when this technique will make sense. (Certainly it would if you could rent a property for more than the two payments and other expenses added up to.)

3. Borrow the down payment on your credit cards. This is either a great way to get into more financial trouble or, if you handle it right, a good way to stop renting. If you can get a $95,000 loan on a $100,000 condo, for example, you only need $5,000 for the down payment. Why not get a cash advance on a credit card when there is a low-interest deal?

Since you can't "borrow" for a down payment according to many lender's rules, get the advance a few months earlier for a "vacation." Take a taxi downtown for your vacation and leave the rest of the money in your checking account until it is time to buy a home. A lender can't read your mind to know what your intent was, so this is legal, but is it unethical? First, I would like to remind you that lenders encourage you to take out unsecured loans for vacations and depreciating assets like cars and boats, while saying you shouldn't borrow for a down payment on a home that will likely go up in value. That may be unethical. Playing by the rules and repaying everything you owe is not unethical.

Just be sure that you have a plan to quickly repay the credit card balance. For example, if you commit to using $2,000 of your tax refund to repay the balance, and otherwise paying $150 on it each month, you should have it paid in less than 2 years. If you can't do that, you are probably just creating more problems for yourself using this strategy.

4. Get a 100% first mortgage loan. There are still some lenders doing these (it is mid-2007 as I write this), and if the seller will pay closing costs, you won't need much cash at all. The catch? You will probably pay higher interest rates for these loans.

By Steven Gillman
Published: 10/15/2007