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.
Is your mortgage taking a toll on your financial wellness? If so, you’re not alone. According to a recent study, at least 52% of Americans have to make at least one major sacrifice to cover their mortgage payment. This stress leads many to feel they’re one paycheck away from losing their home. While foreclosure is a worst-case-scenario for most homeowners, that doesn’t mean you still can’t get out from under your mortgage.
The most important thing to do is simply to act now. If your mortgage is underwater, you need to start swimming today. Many people are able to turn their finances around, save their homes, and avoid bankruptcy. Reclaim your financial wellness with these ways below.
1. Walk Away
While it might seem like walking away is the last thing you want to do, some homeowners feel they’re left with no other option. This is usually the case when the home has negative equity, or the market value of the property falls below the mortgage amount. Many homeowners chose to walk away from their homes during the mortgage crisis of 2008.
The technical term for this in the mortgage world is a strategic default, and it usually involves informing your lender you wish to abandon the property. In most cases, they’ll direct you to one of the methods below.
2. Deed in Lieu of Foreclosure
To deed your property in lieu of foreclosure means to deed your property to your lender. In this case, you’re usually forgiven for the entire amount of the mortgage. The lender then recoups some of this payment by selling the property.
However, you need to prove an extreme circumstance for this to be approved, and many lenders are unwilling to proceed with this method. You stand a better chance of a deed in lieu of foreclosure if you’re in a government-insured loan. If not, keep reading for alternative ways out from under your mortgage.
Most lenders will default to foreclosure if you are unable to settle on a repayment option. This process is time-consuming and can take months. Luckily, that leaves you time to work with your lender on a compromise to avoid losing your home. If you proceed with the foreclosure, you’ll be forced to leave your home after a court judgment.
4. Short Sale
One possible compromise in the case of foreclosure is a short sale. This is when the homeowner asks their lender to accept less than the loan’s balance through the sale of the property. This gives you as the homeowner more control over your home, and it can be an effective way to escape an underwater mortgage.
5. Sell Your Home
Outside of a short sale, you still have options to sell your home. You’ve likely seen advertisements for companies that exist to fix up homes and resell them. There are legitimate companies that do this, and it can be a quick way to avoid negative equity.
While you’ll get paid a discounted amount for the home, you won’t have to worry about the cost of selling it yourself. Additionally, these companies work quickly so you can beat a foreclosure and liquify your assets without the wait.
6. Rent Your Home
If you’re unwilling to sell your home, you can still make back some of your money to put towards a mortgage if you’re able to rent it out. If you have the ability to live elsewhere such as with family, this can be an excellent way to recoup lost funds. This is particularly effective if you live in an area with high rental demand. Before renting your property, always talk with your insurance company about coverage and look into state landlord requirements.
7. Settle with Your Lender
Finally, it might not be in your best interest to get out from under your mortgage. Remember, your lender wants to get paid. They’re often willing to work with you on a solution that keeps you in your home. Your first line of defense if you’re facing negative equity or an underwater mortgage is to talk to your provider. They likely have a protocol and assistance programs for those struggling to make payments.
These 7 ways to get out from under your mortgage help you gain control of your finances. Nobody wants to lose their home. Yet, sometimes it’s best to lose your home on your own terms to protect your credit and get a fresh start. If you find yourself in this situation, you have options. When in doubt, speak to an expert real estate attorney or financial advisor. Just make sure you think them through carefully before taking action.
When a couple lives together it can be confusing as to whose name should be on the mortgage. Maybe you want to split the mortgage to create equal ownership, but that might not always be the best route. Owning a home is a major investment so knowing the facts is extremely important. Let’s start to lay out some mortgage facts so that you and your partner can rest easier.
Title vs mortgage
The title is in relation to who owns rights to the property. A mortgage is an agreement to pay back a loan to lenders. Homeownership strictly falls under having your name on the title and not the mortgage.
Not being named
If you’re not named on the mortgage or title then you are at a major disadvantage when it comes to homeownership. Legally speaking when this happens you have no ownership of the home. If you are taken to court at this point then you will have very little rights to any part of the property. You might not be on the mortgage payments but be sure to be on the title of the home if you want any stake in ownership.
Title of the home
Let’s say you decide not to have both names on the mortgage but are concerned about home ownership. Well, as mentioned before you have the option be on the title of the home which will grant you many rights legally. Doing this as you close is the best option if you want to avoid the headache of doing it later. Once your names are on the title then congratulations on both being homeowners!
However, if your name is not on the title and things go sour between you and your partner then you can end up technically homeless. Any money you put into the home would be gone and you’d lose any rights. Another sad example would be if your partner dies and they were the only one on the title then you can be in for a major legal headache. Save yourself the stress and get on the title.
Name on mortgage
It may sound like a sweet deal to be on the title but not on any of the mortgages but that can end up sour too. When whoever stops paying the mortgage who do you think the lenders will be coming to? Yep, that you and they will take high notice if you’re close to foreclosure.
What if you’re just making mortgage payments? Well, then you could be really prone to taking some damage. The owner of the title could end up selling half the home to someone you don’t know to leave you paying the mortgage for a homeowner you don’t know. Is that likely? No, but it can happen so why leave yourself vulnerable?