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Second Mortgages

Utilizing Your Home’s Equity for Cash

Consider tapping the
home equity safety net that’s right under your roof — for a line of credit or fixed rate mortgage that can equal fast, flexible extra cash. Even if you have lessthan-perfect credit.
If you’ve been making payments on your home loan, or your home’s market value (the price you could get for it if you sold it today) has gone up since you bought it, you probably have equity in your home that you may be able to use for extra cash.


What is home equity?
Home equity is simply the difference between your home’s market value and what you still owe on your mortgage (today’s balance). For example, if you owe $80,000 on your home, but its market value is $100,000, then you may have as much as $20,000 in equity.

Advantages of using your equity for extra cash:
• Lower interest rates than other forms of borrowing • Flexible way to have cash available quickly • Usually a small amount of paperwork needed • Interest payments are tax deductible in most cases* • Can be a smart “emergency” account to help pay for unexpected expenses
*Consult your tax adviser.

Calculate your equity here:

Fill in the blanks below to determine how much equity you may have. Your home’s current market value $____________ (Find your home’s estimated value at or* Current mortgage balance Estimated available equity – $____________ = $____________

Consolidate debt using home equity

Debt consolidation (paying off your credit cards and other debt using the money from your home equity) is one of the most popular uses of home equity. By using your home’s equity, you can often get a lower interest rate than credit cards and other types of loans. Another big advantage is that since you pay off all your other debts, you’ll likely have fewer payments every month.

Other ways to use your home equity

There are no limits on how you can use the extra cash you get from your home equity. Other than debt consolidation, here are some other popular uses of home equity:
• • • • • • • • • Home improvement or repairs Buying a new or used vehicle School tuition and college costs Medical bills Weddings Vacations Start a business Other large purchases such as a boat or RV Investments such as rental property or land

You may be able to access your equity with one of these options:
- A home equity loan (sometimes called a fixed rate second mortgage) - A home equity line of credit (sometimes called a HELOC for short, pronounced “he-lock”) - A home loan refinance (also called cash-out refinance), where you pay off your existing mortgage with a new mortgage and get cash back.
* and offer home value estimates only and should not be relied upon for actual loans.


Home equity loans:
also known as second mortgages
A 2nd mortgage — using the available equity in your home to put cash in your pocket — can be a great financial tool, even if you have less-thanperfect credit. But is it right for you?
Why choose an equity home loan?
If you’re interested in using your home’s equity to pay off a large amount of credit card and other debt, or to pay for a large, planned purchase — but you don’t want to worry about an interest rate or payment that might change — a fixed rate second home equity loan may be a good option for you. Unlike home equity lines of credit, which give you a pool of money to draw from over time as you need it, equity loans give you the money all at once. That’s why home equity loans can be perfect for a one-time debt consolidation (paying off your other debt with the equity cash) or big purchases like a new or used car or home improvement plans.

Why an equity loan can be a good thing:
• Offers an interest rate and a monthly payment that will not change • You’ll know exactly when you’ll pay off the loan after a certain number of payments • Usually the interest rate for an equity home loan is lower than credit cards and other types of loans • The interest, in most cases, is tax deductible and that will save you money on your tax return*
* Consult your tax adviser.

If you’ve built equity in your home (meaning your home is now worth more than you owe on your home loan), then it may be simple to turn that equity into cash. One option to accessing your equity is through a home equity loan, also called a second mortgage. Other ways are a home equity line of credit and a refinance of your existing home loan.

If you’re trying to decide between an equity home loan or line of credit, a good resource is the Federal Reserve Board Web site.


Home equity line of credit
means accessing cash as you need it
Why a home equity line of credit can be budget-smart:
- You can borrow money as you need it, up to a credit limit - Interest rates are usually lower than credit cards and other types of loans - Unlike credit cards, the interest you pay is tax deductible in most cases** - As you pay down your balance, it frees up your home equity line of credit money again - Interest only starts being added as you use the money. This is different than an equity home loan, where interest starts being added right away for the whole amount of credit you receive - During a home equity line of credit “draw period” (typically the first five or 10 years), you have the choice of making a low, interest-only payment - A home equity line of credit provides an available emergency fund during the draw period

Let your home equity help you out when cash flow is low. Get a home equity line of credit with a low interest rate and simply borrow as you need it, even if you have less-than-perfect credit. It’s more flexible than an equity home loan — but there are trade-offs.
If you have equity in your home, you may be able to open a home equity line of credit, even if you don’t have any uses for it in mind yet. Home equity lines of credit (also called HELOCs for short, pronounced “he-locks”) work much like a credit card — you have an available credit limit, and you are not charged interest until you use funds from your line. Along with that flexibility comes convenience: A line of credit can usually be accessed by an access card, similar to a debit card, or checks. Plus, you could choose to use the home equity line of credit for anything you’d like: paying off your other monthly bills,* taking on home repairs or improvement, paying for a vacation or wedding.

Be aware that depending on the terms of your line, you may only be able to borrow a certain percentage of your equity. This percentage is what’s called the loan-to-value ratio or CLTV (amount borrowed ÷ current market value).

Other home equity line of credit features to think about.

After the first five or 10 years of your line of credit, you may not be able to access your line any longer for more cash, and you usually have to start making payments that include both interest and a part of your balance (called “principal”). That means your payment will likely be higher during the repayment stage than it was in the draw period. Also, unlike an equity home loan that has a fixed interest rate for the life of the loan, a home equity line of credit’s minimum payments and interest rates can change.
* Refinancing or taking out a home equity loan or line of credit may increase the total number of monthly payments and/or the total amount paid when compared to your current situation. ** Consult your tax adviser.


Why a 125-percent equity home loan
may be the second mortgage solution for you
Need to tap your home equity for extra cash but worried you don’t have enough equity in your home? A 125percent equity home loan can help. But read on to learn the pros and cons.
If you’re a homeowner interested in an equity home loan, but you haven’t yet built up a large amount of equity, getting extra cash may still be possible with a 125-percent loan. A 125-percent equity home loan is a 2nd mortgage loan that allows qualified borrowers to borrow up to 25 percent more than the market value of their home. For example, if your home is worth $100,000, a 125-percent loan would allow you to still borrow up to $25,000 for extra cash, even if you don’t currently have any equity in your home. Your credit score also is taken into account when the bank figures out how low your interest rate will be. You can usually choose between a fixed-rate or adjustable-rate equity home loan.

Things to think about before you apply for a 125-percent equity home loan

If home prices in your area are not on the rise, and you plan on selling your home sooner rather than later, you may want to be cautious when applying for a 125-percent equity loan. In a situation where you might have to sell before you pay

Calculate how much you may be able to borrow here by entering your information in the worksheet below: How a 125-percent equity home loan works
125% allowed loan-to-value (LTV) is your home’s current market value $_____________ x 1.25 = Amount you can borrow $_____________

back your equity loan, and the prices in your neighborhood are not on an upswing, you might end up owing more for your home than it’s worth. Another point: 125-percent equity home loans generally have higher interest rates than other types of equity loans, because banks consider them riskier than loans based on 100-percent equity. Also, with a 125-percent equity loan, the federal government won’t allow you to deduct the interest payments from your taxes, which you can usually do with a 100-percent (or less) home equity loan. (Consult your tax advisor)

The 125-percent equity home loan is usually offered to certain qualified people — people who may not have equity in their home yet, but who have good credit scores. Generally, lenders want you to have lived in your home for at least three months before offering this type of 125percent equity home loan. Your credit score will also determine the amount of money you can borrow. The higher your score, the more cash you’ll qualify for up to 125-percent of your home’s value.


Cash Out Refinance Loan
Using Your Home Equity to Pay Off Debt and Get Extra Cash
Refinance your home. Get cash back. Use your home equity for debt consolidation (paying off your other bills) or large expenses. It’s an alternative to an equity home loan — and it can be a budget-smart solution, even if you have less-thanperfect credit.
The concept of a cash out refinance loan is simple: you refinance your existing mortgage for more than you currently owe (up to the amount of your home’s current value), and get cash back for the difference. You can then use that cash to consolidate other debt or for anything else you choose — for home improvement, a new vehicle or vacation, even medical or education expenses. With a cash out refinance loan, closing costs (the normal home loan financing fees) can often be rolled into your new mortgage balance, so there’s little or no out-of-pocket cost to refinance.* Another plus? If your finances have improved or interest rates have gone down, you could get a lower interest rate than on your original loan.

Because home loan interest rates are typically lower than credit card and personal and auto loan rates, cash out refinancing may save you money on interest charges.** That also means you could pay a lower total amount each month in bills, and you get the convenience of paying only one bill instead of many. In addition, the interest you pay on a home loan is tax deductible in most cases, so you also save money on your tax return each year.***

Debt consolidation: when cash out refinance can really pay off

The number one use of a cash out refinance loan is to consolidate debt by paying off other credit card and high-interest debt and rolling it all into your new mortgage amount.

* Borrowers who choose to pay closing costs upfront may qualify for a lower rate. ** Refinancing or taking out a home equity loan or line of credit may increase the total number of monthly payments and/or the total amount paid when compared to your current situation. *** Consult your tax adviser.


Take a look at just one example of how a cash out refinance loan could save you money both monthly and over the course of a year during the fixed period of the loan!
Current Balance Current Home Loan Credit Card #1 Credit Card #2 Retail Card/Store Charge Total Refinance Loan Amount Monthly Payment Savings Annual Payment Savings $152,000 $10,000 $12,000 $8,000 $182,000 $190,000 $641 $7,692 Current Monthly Payment $1,102 $300 $360 $240 $2,002 New Payment $1,361 $0 $0 $0 $1,361

The above cash out refi scenario is based on the following assumptions: Sample current loan: 30-year, fixed-rate loan, $152,000 loan balance at 7.875%. New loan: $190,000 loan balance, 3/27 fixed-period adjustable rate mortgage, 3 year pre-pay, 2 points, 7.75% Interest rate, 8.87% APR. Credit card and store charge payments assume minimum payment of 3% of balance. ARM rates are subject to

increase after the fixed period of the loan. The loan will then be fully amortized over the remaining term as an adjustable-rate mortgage that adjusts once a year. Any rate increases will make monthly payments higher and the estimated annual payment savings lower after fixed period of the loan. Monthly payments are principal and interest only, owner occupied, single family residence.


Using your home equity for home improvement:
How much will your project cost?
Before you use an equity home loan, equity line of credit or equity cash out refinance loan to remodel your home, be sure to calculate your costs carefully.
Home equity can be a great source of funds to pay for home improvement. Below, we’ve gathered a few tips to help you use your equity dollars wisely.

3. Start planning a budget, keeping in mind these important facts:
• Calculating the cost to remodel or repair your home can vary by region and season • Expanding your home’s physical structure is more costly than making an internal home remodeling change • Calculating the costs of remodeling requires pricing the following: ___construction materials and labor (unless you do it yourself) ___permit fees ___decorative enhancements ___repairs due to remodeling ___cleanup Your contractor should provide these costs when they submit a bid.

1. Determine what you can afford

If you’re using your home’s equity, you’ll need to consider exactly how much equity you have, then how large of a monthly payment you can afford. See page 1 of this guide for more information on how to calculate your home equity. Once you determine how much you can afford, decrease that amount by 10 to 20 percent. This amount should be reserved to cover any unexpected costs along the way.

2. Unexpected Costs

Other budget tips: • Plan ahead. Go through the design process first and choose everything you want to include in the new room(s), from appliances to light fixtures. This will prevent hasty decisions later. • Consider product choice. Determine whether you can achieve a similar look with a less expensive product. • Pay attention to how labor-intensive particular design features may be, for example, laying ceramic tile on kitchen countertops. • Think about staging the work over a period of time to lessen the impact on your pocketbook.


4. Get financing.

Home equity loans and lines of credit can be two budgetsmart ways to finance remodeling projects. In fact, home improvement is the second most popular use of home equity loans.

By using your home’s available equity to fund remodeling, you may be opting for a low-interest, low-monthly payment way to achieve your goals. In addition, the interest rate you pay is usually tax deductible.*
* Consult your tax adviser.

Cost vs. Value (2005 National Averages)

Starting to plan a project but not sure if it’s worth the cost? The best return on value in 2005 was typically seen in bathroom additions, siding, and kitchen remodeling for which in most cases, homeowners can expect on average to recoup over 90% of their investment in resale value.**
**REMODELING Magazine “Cost vs. Value Report”

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