Second Mortgages:
Utilizing Your Home's Equity for Cash
Consider tapping the
home equity safety net that's
right under your roof 00/span>
for a line of credit or fixed
rate mortgage that can
equal fast, flexible extra
cash. Even if you have less-
than-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.
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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.
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
www.zillow.com or www.homevaluecentral.com )*
Current mortgage balance
- $____________
Estimated available equity
= $____________
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.
* Zillow.com and HomeValueCentral.com offer home
value estimates only and should not be relied
upon for actual loans.
Advantages of using your equity for extra cash:
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:
What is home equity?
00 Lower interest rates than other forms of
borrowing
00 Flexible way to have cash available quickly
00 Usually a small amount of paperwork needed
00 Interest payments are tax deductible in
most cases*
00 Can be a smart "emergency" account to help pay
for unexpected expenses
*Consult your tax adviser.
00 Home improvement or repairs
00 Buying a new or used vehicle
00 School tuition and college costs
00 Medical bills
00 Weddings
00 Vacations
00 Start a business
00 Other large purchases such as a boat or RV
00 Investments such as rental property or land
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0
Home equity loans:
also known as second mortgages
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.
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 00but you don't want to worry
about an interest rate or payment that might change 00a
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:
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 .
A 2nd mortgage 00using the available
equity in your home to put cash in
your pocket 00can be a great financial
tool, even if you have less-than-
perfect credit. But is it right for you?
00 Offers an interest rate and a monthly payment
that will not change
00 You'll know exactly when you'll pay off the loan
after a certain number of payments
00 Usually the interest rate for an equity home
loan is lower than credit cards and other types
of loans
00 The interest, in most cases, is tax deductible and
that will save you money on your tax return*
* Consult your tax adviser.
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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 00you
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.
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
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 梅 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.
Home equity line of credit
means accessing cash as you need it
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 00but
there are trade-offs.
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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.
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
The 125-percent equity home loan is usually offered to
certain qualified people 00people 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 125-
percent 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.
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
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)
Need to tap your home equity for
extra cash but worried you don't have
enough equity in your home? A 125-
percent equity home loan can help. But
read on to learn the pros and cons.
125% allowed loan-to-value (LTV) is your home's
current market value $_____________ x 1.25 =
Amount you can borrow $_____________
Why a 125-percent equity home loan
may be the second mortgage solution for you
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1.25
0
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 00for
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.
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.
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.***
* 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.
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
00and it can be a budget-smart
solution, even if you have less-than-
perfect credit.
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Current Home Loan
Credit Card #1
Credit Card #2
Retail Card/Store Charge
Total
Refinance Loan Amount
Monthly Payment Savings
Annual Payment Savings
Current Balance
$152,000
$10,000
$12,000
$8,000
$182,000
$190,000
New Payment
$1,361
$0
$0
$0
$1,361
$641
$7,692
Current Monthly Payment
$1,102
$300
$360
$240
$2,002
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.
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!
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Using your home equity for home improvement:
How much will your project cost?
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.
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.
2. Unexpected Costs
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.
3. Start planning a budget, keeping in mind these
important facts:
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.
00 Calculating the cost to remodel or repair your
home can vary by region and season
00 Expanding your home's physical structure is
more costly than making an internal home
remodeling change
00 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.
Other budget tips:
00 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.
00/span> Consider product choice. Determine whether
you can achieve a similar look with a less
expensive product.
00 Pay attention to how labor-intensive
particular design features may be, for example,
laying ceramic tile on kitchen countertops.
00 Think about staging the work over a period of
time to lessen the impact on your pocketbook.
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4. Get financing.
Home equity loans and lines of credit can be two budget-
smart 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"
Call the financial freedom experts at Countrywide
Home Loans today: 1-800-643-1317
Equal Housing Lender. 漏2008 Countrywide Bank, FSB, Full Spectrum Lending Division. Member FDIC. Trade/service marks are
the property of Countrywide Financial Corporation, Countrywide Bank, FSB, or their respective affiliates and/or subsidiaries.
Some products may not be available in all states. This is not a commitment to lend. Restrictions apply. All rights reserved.
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