Did you know you could have access to the equity you built on your home without having to sell the house itself? By taking a second mortgage, you could have access to a large sum of cash while still enjoying your home. There are two kinds of second mortgages:
- When taking an equity loan on your home, you will have access to a lump sum of money usually financed by a fixed rate loan: you will repay a set amount of money every month
- When taking a home equity line of credit (also called HELOC), you will basically use your loan like a credit card: your lender will decide on a maximum borrowing limit, and you can borrow as much or as little as you want within these limits over time. This type of loan generally has a variable rate.
Although having access to this cash can be an attractive idea, there are pros and cons to a second mortgage you will need to keep in mind before taking that decision.
- Quick access to a large sum of cash at a favorable rate: a lender will usually approve you to borrow 75 to 85 percent of the loan-to-value ratio of your first and second mortgages combined. Several factors like your credit score will determine your interest rate, but they are usually significantly lower than the ones you would get for a credit card. However, keep in mind that the interest rate on your second mortgage is likely to be higher than the one on your first mortgage since the second lender is taking more risk.
- Your loan payment might be tax deductible: consult your tax adviser to check is the interest paid on your second mortgage might be tax deductible
- Use the money to improve your equity on your house: a common use for the money obtained from a second mortgage is to improve your home, by either renovating it or adding elements like a deck or an addition. Either way, you are adding to the value of your home. You could also use the money to consolidate your debt, avoiding the high interests on your credit card debt
- You could lose your home: since you are using your house as collateral, you would lose your house to foreclosure if you were to default on your payments. Choose what you spend your money on wisely and don’t overextend yourself. For example, funding your lifestyle or spending it on frivolous items, like a luxury vacation, could put you in a difficult spot
- There are significant fees to getting a second mortgage: like for first mortgages, second mortgages (a home equity loan in particular) comes at a cost. You will have to pay for an appraisal, closing costs, application fees and so on. For a home equity loan, count between 3 and 6% of the total loan amount in closing fees. Although there are no closing fees for a HELOC, the interest rates tend to be higher, and you will pay more in the long run.
Although acquiring a second mortgage can sometimes be a great idea, consider carefully which type of second mortgage makes the most sense for you, and, most importantly, what you will be spending this money on.
Buying or selling a house can be a stressful and vulnerable time for every party involved in the closing. To make sure that the process goes smoothly, make sure that you are familiar with your rights and obligations as a buyer and as a seller ahead of time!
As a buyer, you are entitled to the following elements:
- You have the right to house-hunt without facing discrimination thanks to the Fair Housing Act which prohibits discrimination in the sale, rental, or financing of dwellings and other housing-related activities on the basis of race, sex, disability, color, religion, familial status, or national origin.
- You have the right to know about any potential health hazards linked to the property, including waste management, water supply, insulation, hazardous materials (such as lead paint). Disclosure agreements vary state by state: you can find which forms are requested from the buyers here.
- You have the right to made aware of the financial history of the property, including property taxes and any encumbrance on the title (such as liens, easements, or any other issues)
- You have the right to access any information that will help you get a fair deal on the property. This includes an objective appraisal, and market price analysis and comparison
- You have the right to have access to all the information regarding closing, including a copy of the purchase and sale agreement, a walk-through of the property before closing and access to the settlement statement at closing
As a seller, you are also protected by real estate laws and have the right to the following elements:
- You have the right to advertise the property for sale in a public listing or another similar forum, with the help of a real estate agent or not
- You have the right to set a price for your property that you deem reasonable, backed by truthful and accurate information
- You have the right to request a home inspection prior to closing
- You have the right to protect yourself by requiring that a deposit or a certain amount of the purchase price be placed in escrow before closing, and may request verification of financing or a mortgage loan before the sale is finalized
- Finally, you have the right to accept or refuse an offer, for example, if you find it to be too low, if you are worried about the potential buyer’s financing abilities, or simply if you changed your mind about selling the house in the first place. However, per the Fair Housing Act, you cannot refuse to sell your property to a specific buyer based on his or her race, color, sex, familial status, or national origin.
Shall any legal issues arise during the closing process from either the buyer or the seller, the best course of action would be to hire a real estate lawyer. He or she will be able not only to help you know your rights but also to provide legal representation and council if the dispute was to lead to a lawsuit or any other legal proceeding.
When you’re trying to buy a home in a competitive market, you might feel like it’s best to skip the home inspection. That seems like an easy way to make your offer seem more attractive to sellers, and it’ll also speed up the buying process. A win/win situation, right?
Wrong. Waiving inspections when buying a home is never a good idea. The home might look fine when you inspect it yourself with the naked eye, but you never know what’s behind the scenes. A lot of the biggest issues a home can have aren’t detectable if you aren’t an expert. No matter how much you want the home, it’s always best to have it inspected by an expert. Here are the risks of waiving inspections when buying a home.
Who Conducts Home Inspections?
Home inspections are much different than your own walks through the property. Home inspections are done by licensed professionals who know what to look for, and they know how to detect problems. They look into areas of the home you might not pay attention to when you’re walking through the home, from the HVAC to the foundation.
These home inspectors are held to a strict Code of Ethics and Standard of Practices created by the American Society of Home Inspectors (ASHI). You need a qualified opining on the quality of the home, not just aesthetically but foundational. The cost of inspecting a home is more than worth the peace of mind of knowing you won’t run into any surprises once you move into the space.
If you’re an experienced homeowner, you might think you can manage a home inspection on your own. However, professional inspectors are skilled in the elements of home construction, maintenance, and safety. They understand the most important signs of disrepair, and they aren’t likely to overlook anything. It’s best to leave the inspection to the pros.
What are the Risks?
What happens if your home isn’t inspected? While it’s easy to think it’s as simple as skipping the lengthy and costly inspection process, this isn’t the case. Whether you’re buying a new construction home or an existing property, you need to get the property looked at by a professional. If you don’t, you’ll find yourself facing the following.
- Not Insurable – Some home insurance companies won’t issue a policy if you don’t have a documented inspection. Without insurance, you won’t get final approval for your mortgage.
- Safety Concerns – Without an inspection, it’s impossible to know if your new home was safely constructed and currently safe to live in.
- Legal Out – When an inspector finds a large problem with a home, you’re legally allowed out of the agreement through a contingency clause without losing your deposit.
- Expensive Repairs – One of the most obvious risks is that you’re purchasing the home “as-is.” With that in mind, any repairs will need to come out of your pocket.
- Negotiation – Finally, any issues found during the home inspection can be used as a valuable negotiation tool. You can choose for the seller to fix these repairs before you agree to purchase the home, or you can even negotiate the selling price.
As you can see, if you skip your home inspection, you might find yourself facing an extreme case of buyers remorse. While your inspection might seem like an unnecessary extra step, especially if the home appears to be in good condition, it exists for your protection as the homebuyer.
Buying a home is one of the biggest investments you’ll ever make. You wouldn’t enter an investment blind, so don’t go into your new home blind. Use a qualified home inspector to ensure you know exactly what you’re getting into when you buy a home.
If you are locked in a high-rate mortgage that is affecting your finances, you might have considered refinancing your house However, it is not a miracle solution for everyone. A common misconception is that refinancing your home essentially consists in updating the terms of your real estate loan. It is not: refinancing your mortgage comes down to taking down a new mortgage entirely.
To know if it is the right choice for you, here are a few things you must consider before taking the plunge.
1. How does the terms of your current mortgage compare to your new terms?
Unlike a personal or auto loan, refinancing your mortgage is not free: it comes with closing fees, usually equivalent to 1 to 5% of your new loan amount. For a new mortgage to be worth it, you must consider the difference in interest rate between your new and your old mortgage. How long will it take you to recoup the impact of your closing costs with your new loan?
A rule of thumb is that your new mortgage interest rate should be at least one point lower than your previous rate to be worth it.
How does the terms of your new mortgage will affect your private mortgage insurance? If your house equity has increased during the life of your previous loan, you might not need to pay PMI anymore. However, if the value of your house has decreased, you might need to start paying for a PMI.
Another thing to consider is how far from the break-even point you are in your current mortgage: if you are planning to move at short to medium term, but that you have been paying your current mortgage long enough that your payments go towards the principal of your loan rather than the interest, refinancing might not be an interesting option.
Refinancing can also be an interesting option if you want to change the type of mortgage on your real estate property entirely. If you started with an Adjustable Rate Mortgage, you might qualify for a lower fixed-rate mortgage.
2. Can you qualify for a new loan with better terms than your previous one?
Like for any new real estate loan, your lender will consider several factors before granting you a new mortgage. Don’t hesitate to shop around to see which lender might be willing to offer you more interesting terms.
If your credit score has gone up since you got your old loan, refinancing with better terms might be interesting for you. However, if you have fallen on some hard time and your credit score has taken a hit, refinancing might cost you more. If that is the case, spending some time working on improving your credit score before refinancing will save you money in the long run.
How much equity you have in your house will also be crucial for your lender to decide on the terms of your loan: if the house values in your neighborhood are going down, now might not be a good time to refinance. To qualify for more advantageous terms, you should have at least 20% of equity in your house.
Lenders will also consider your debt-to-income ratio before granting you new terms to your real estate loan, so pay off whichever debt you can before applying for refinancing.
3. What is your goal for your house?
Before refinancing your home, you must ask yourself why you want to apply for a new loan. Getting a lower down payment is only the short answer to a more complex question.
If you are planning to move in the semi-near future, refinancing probably will not save you any money.
Refinancing can be an interesting option if you are trying to pay off your real estate property sooner than later, before retiring for example, refinancing your mortgage from a 30-years term to a 15-years term can raise your monthly payments but will save you money in the long run since you will not spend as much on interest.
Refinancing might also allow you to cash-out on your house equity. However, consider this option carefully before spending this money on your dream vacation, and use it to improve your equity on your house instead.
In conclusion, there is no one-fits-all solution when it comes to refinancing. The best thing you can do before taking this decision one way or another is to meet with a financial advisor who will be able to help you figure out what is the best course of action in your particular circumstances.
Buying a home comes with a lot of confusing steps that often intimidate new buyers. If this is your first time going through the home buying process, you might be concerned about escrow. The good news is that this is the home stretch of the process, and your home is closer than you think.
It feels like forever when you’re waiting for the keys to your new property, but the time will fly faster than you think. This article will define the escrow process so you know what to expect when buying a home.
What is Escrow?
In the world of home buying, escrow is the holding area where the money and contracts are secured until your home is closed. Before the title to your home is physically in your hands, it’s kept with an escrow officer. This officer is a third-party, and they’re usually from the closing company or title company (some states require this to be an attorney).
You’re probably asking why a third-party needs to be involved at all in your home buying process. Simply, it’s for the protection of the buyer and the seller. They make sure everything goes smoothly during the closing process. They protect things like your money and your contracts until it’s time to finish the process completely.
All of your documents will be filed with the escrow officer while you handle your closing. This might include things like home inspections or repairs that need to be done by either party. Finally, when all the conditions for selling are met, the money is transferred to the seller while the records or title is given to the buyer.
Why Escrow Protects Buyers and Sellers
While it might sound like a pain when you’re in the moment, escrow actually servers both the buyer and seller in a big way. The buyer benefits from the escrow by being able to make sure contingencies are met before their money is transferred to the seller. For instance, if the seller agreed to fix a problem with the plumbing, escrow will ensure these funds aren’t transferred until those repairs are complete.
It’s not just the buyer that benefits from the escrow process. Sellers also have the added peace of mind of knowing there’s a security deposit in case the buyer backs out at the last minute. This can be anywhere from 1-2% of the cost of the home which is held in escrow. If the buyer backs out without any real reason, this deposit is then given to the seller for the failure of the sale.
Think of the escrow process as a way to make sure the home sale is done correctly and with consideration for both parties. It also includes a third party who is able to check all documents, contracts and funds are secure and dealt with properly the first time.
Yes, it’s frustrating as both the buyer and the seller to wait for the completion of the escrow process. It’s time-consuming and costly, but it’s also a necessary part of buying a home. It’s there for the protection of both the current homeowner and the new one. It doesn’t affect your home buying process in any way except by making it more secure and reliable for everyone involved.