Introduction
With today's low mortgage rates, many people are using home equity loans to do just that. Additionally, some refinance their homes while also taking cash out, using the "two birds, one refinance" strategy.
With a home equity loan, you can take equity out of your primary residence or an investment property.
A "rate and term" refinance is one that most people do to refinance for a lower rate. One option keeps the loan amount constant while changing the mortgage's term or rate.
Perhaps they are switching from a 15- to a 30 year note. Because they are only changing the rate or the term of the initial loan, this is known as a rate and term refi.
Lower interest rates do result in lower payments.
However, some clients opt for a "cash out" refinance (Home Equity loan), which entails taking equity (cash) out of their primary residences or investment properties for other uses, such as debt repayment or the purchase of additional real estate.
Let's say, for instance, that a family owes $1,500 and makes a $450 car payment each month. Families frequently refinance their homes when they have enough equity in them to do so, using the proceeds to pay off other high-cost debts like credit cards, auto loans, and other instalment loans. Although the car payment is gone, the house payment may increase by $50. Consequently, a family has $400 extra each month.
Some advise against using home equity loans to pay off debt, claiming that spreading a 3-5 year debt out over 15–30 years is not a good idea. These people are correct, too. However, when I assist a client in saving $400–500 and occasionally $1000/month, these families can now afford to make extra mortgage payments and pay off their 30-year mortgage in 12–15 years.
In fact, after taking out a home equity loan, a family will typically pay off their house sooner than they would have otherwise.
The Rule of Home Equity
Because one is increasing the initial loan amount, home equity loans have slightly higher rates than traditional rates and term refinances. Additionally, taking cash out of a home or investment property entails taking out a loan with a higher risk. "Higher risk" refers to a marginally increased rate.
The most your new loan could be is $160,000 if your house is worth $200,000. If you owe $100,000, you could borrow up to $60,000, or 80%.
The 3 percent home equity rule is another. This means that the overall fees cannot be more than three percent of the loan amount. Those with smaller home loan balances are primarily impacted by this. If we are only allowed to lend up to 80% of the value of your home, for instance, your loan might only be for $60,000 in this case. $1800 is 3 percent of $60,000. Therefore, it's not difficult to be over 3 percent. If your title company charges $700 for the title policy, your appraiser charges $325, and the bank charges $500 to underwrite your loan, As a result, the mortgage company would be limited to charging $275 in order to comply with the 3 percent rule.
Home equity rules of 12 days and a 3-day wait before we fund
Even a special 12-day letter needs to be signed for me. After we close, we will need three days to fund the mortgage.
Home equity refinances can be a great way for many people to launch a new financial strategy. To assist my clients, I provide them. Become debt-free, settle bills, and have more money to invest and save. My clients have been able to save hundreds each month by paying off their high-interest credit cards. My personal best was using a home equity loan to save a family $1,000 every month.
Once they have saved up this cash, they intend to make extra mortgage payments in order to pay off a 30-year loan in 15 years. Therefore, when used properly, a home equity mortgage is a fantastic way to advance financially.
Conclusion
Five years in the mortgage industry have led me to develop my own personal lending philosophy. because anyone can obtain a mortgage. However, my company is assisting people to advance financially, beginning with the mortgage, which is a family's largest outlay.
Most of my clients are aware of my personal approach to lending for mortgages. I usually lean toward what is best for the client both now and in the future. Let's use this program if someone needs a 15-year mortgage with low closing costs. Debt consolidation is required. A home equity loan will be used.
