Using Your Home Equity

Refinancing and Second Mortgages

Home Equity

There are several ways you can use the equity in your home to provide you with immediate financial benefit. You can refinance your home, take out a second mortgage, or request a home equity line of credit.



There are situations where these can be good ideas, but too often people do them for the wrong reasons and end up in danger of losing their home. Stay at home moms know that learning to curtail bad spending habits is the key to financial stability. This can also keep you away from the prospect of using your home to consolidate your debt.

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Refinancing

The idea behind refinancing your home is to secure a better interest rate.

If your credit score is high, you have a good chance of being approved, and this can be a very good thing if interest rates have dropped dramatically since you first financed the house.

However, you should only refinance with a fixed rate mortgage that cannot increase.

An ARM, or Adjustable Rate Mortgage is often offered, but is a bad idea for several reasons. In contrast to a fixed mortgage, where your interest rate and payment stay the same, an ARM is based on the prime interest rate.

The prime interest rate is normally 3% more than the federal funds rate, and is the rate banks give customers with good credit. Your ARM, if your credit has a ding or two, could be calculated at prime rate plus a few percent more. The federal fund rate, and thus the prime interest rate is subject to change, and if it rises so does your house payment.

Refinancing with an ARM is a trap many people fall into, because it gives you a very low rate for the first year. In an economy where the rates start to rise rapidly, you run the risk of losing your house if the payment becomes so high as to be unaffordable.

An interest point or two may not seem like a big deal, but when it applies to your mortgage, it could become several hundred dollars per month. It is not uncommon for a $900 mortgage payment to climb to $1600 mortgage payment in a matter of months.

Thinking you will just refinance again is not the answer either, because often the housing market will nose-dive as people scramble to deal with the increased interest rates and refinancing becomes very difficult.

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Second Mortgages

A second mortgage , also called a home equity loan, is a mortgage against the house in addition to the primary mortgage. Many people take out a second mortgage to pay off credit card debt, go on a vacation, or pay for a wedding.

The bad thing about second mortgages is that they cause many home loans to turn upside down, with more being owed on the house than it is worth.

The country is currently in a crisis situation because of the fact that so many people have upside-down mortgages!

When families take out the equity in their homes, their investment ceases to exist.

Instead they are constantly trying to catch up, having added more to their monthly bills and length to the life of their debt.

The most popular and widely advertised reason for a second mortgage is credit card debt consolidation. Again, this does not really solve the problem, as most people go straight back out and charge their cards up again since they don’t learn from their mistakes. You need to implement good spending and saving habits before taking action that could jeopardize your home.


Your House is Not an ATM!


The one instance where a second mortgage might be a good plan is to finance a necessary expense, such as a vehicle. You might be able to get a better rate on a mortgage than you could from the car dealer, and save some money that way.

Just be sure that your two mortgages together don’t total more than 80% of your total equity. Example:

Your House is worth $100,000

Your first mortgage is $65,000

Don’t take out more than $15,000

This will put you right at the 80% threshold.

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Lines of Credit

These loans are encouraged by lenders and touted as a way to pay for home improvements or a trip to Disney World.

They are really nothing more than a second mortgage in disguise, and can be deadly if you get stuck and can’t pay your bills.

A line of credit is different than a home equity loan in that you apply for and receive a lump sum for a home equity loan, with set terms and a specific payback schedule.

A line of credit behaves more like a revolving credit card account, where you can make separate purchases at different times and the bank keeps track and adjusts your payments accordingly.

These are only good if you use them to significantly better your life (such as a necessary, emergency home improvement cost) and you should be absolutely sure you can afford the payments.

Weigh all your options, and shop around before committing to a refinance, second mortgage or home equity loan or line of credit. If it truly seems the wisest course, Go for it, but remember to budget carefully and spend wisely to avoid the possibility of losing your home if you hit a rough patch!


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