Do you currently own a house and wondering how to access your home equity for home improvement, debt consolidation or even to buy a house? What is the difference in a heloc vs fixed rate 2nd mortgage? What are the pros and cons of a home equity line of credit? In this video, we discuss how to access your home equity while keeping your super low mortgage rate and helping you become The Educated HomeBuyer.
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Connect with me 👇 Jeb Smith (huntington beach Realtor/orange county real estate) DRE 01407449 Coldwell Banker Realty ➡I N S T A G R A M ➳ https://www.instagram.com/jebsmith ➡Y O U T U B E ➳https://www.youtube.com/c/JebSmith
Connect with me 👇 Josh Lewis (Huntington Beach Certified Mortgage Expert) DRE 01209148 Buywise Mortgage M:714-916-5727 E: josh@buywisemortgage.com ➡I N S T A G R A M ➳ https://www.instagram.com/joshlewiscmc ➡Y O U T U B E ➳https://www.youtube.com/c/buywiseborrowsmart
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For Show Notes, See Below 👇
[00:00:00] Jeb Smith, Huntington Beach Realtor: How do you access your home’s equity while keeping your low fixed rate first mortgage? That’s a question that a lot of people are asking at the moment. And many people know the answer to that question. It’s either done by a home equity line or a second mortgage, but there’s a lot of questions surrounding the two.
So in today’s episode, we’re going to take a deep dive into home equity lines. We’re going to talk about second mortgages. We’re going to talk about how they work, how you use them, when it’s a good idea to take one out when it’s a good idea to refinance your first.
And Josh, you know, this is an episode that we probably should have had months ago if we’re being completely honest here because rates have risen so much and there’s still a lot of people out there that are looking to take cash out for debt consolidation for home improvements for potentially buying other properties whether it be an investment or a primary.
And so today we’re gonna do what we should have done months ago and dive into that rabbit’s hole and help you make sense of home equity lines and everything that goes with it.
So Josh, maybe start with the idea of what is an equity line, make it really, really simple so we have a basis to jump off of.
[00:01:16] Josh Lewis, Certified Mortgage Consultant: Absolutely. Let’s actually start with why they are more important starting early 2022. Say from 2020 through early 2022, we had two factors that were leaning against taking any type of second mortgage, either a fixed second mortgage or a home equity line of credit.
And that was properties were appreciating quickly. So most people had enough equity to do a refinance that they could take the cash out that they needed to. And then most importantly, rates were lower. So you could oftentimes lower your interest rate and access some cash with one new fixed rate first mortgage.
So from that perspective, why would I want a second? Now we flipped that on its head. Very early in 2022 rates went from 3% to 4.5%. And everyone said, “Whoa, I’m not going to give up my 3 percent rate to take out a four and a half percent cash out rate. I’m not doing it.”
So the interesting paradox there, Jeb, people were doing the exact wrong thing. I told them at that time, please do not take out a home equity line of credit. “No, I’m going to, because I can get it at, you know, 3.5%, 4%. It’s a great rate. If I take a fixed second, it’s at like 5.25%. I’m not taking five and a quarter money.”
Okay, but, and we’re going to get into this in detail, the home equity line of credit is a variable rate. And now we’ve seen those run up with every Fed rate hike while the people last year that took out fixed seconds are sitting on a nice fixed rate at five and a quarter, five and three quarters, six and a half percent.
So we’ll see how that’s changed. And we’re going to talk later about how that impacts the decision of what to do today. Cause it’s almost the polar opposite of last year.
So any type of second mortgage is in a second lien position behind your current first mortgage. So you get to keep your ultra low 30 year fixed rate, [00:03:00] and you get to access some of the equity in your home by placing a second mortgage in a subordinate position behind your first, generally with a new lender.
So the new lender loans you a portion of money. They have an inferior lien position behind your first mortgage lender. So if you stop making your payments, they have to make the first lender whole before they get paid or they can get blown out entirely. So these are more risky to that second lender.
But the most important thing for you to know is it’s another loan with another payment and you can do it either with a fixed rate, and that requires getting a lump sum at one time, or we can do it with a line of credit that is a variable rate, but can be accessed over time much like a credit card.
[00:03:42] Jeb Smith, Huntington Beach Realtor: Yeah. Like a credit card. So essentially it’s a credit card using the equity in your property as collateral. So a lot of people do home equity lines because they can pay them off and then reuse them again at some point in the future. But in today’s episode, we’re going to talk about really when that makes sense, Josh.
And I know a lot of people out there probably listening to this going, “it’s an awful idea to access your equity. Why would you want to pull cash out of your property? It’s a bad idea. It’s exactly what happened in 07, 08 people tapped their equity, property values went down, they were maxed out. That’s how the whole thing started. So you should never do that.”
So Josh. I’m going to throw this back your way. Is it a good idea to access your equity? Can it be a good idea to access your equity?
[00:04:25] Josh Lewis, Certified Mortgage Consultant: I love the question. This may be the best question we’ve had in the history of the podcast. So what we talk about here is achieving mortgage freedom. Owning a home, taking out a mortgage, fixing that payment, paying it off over time.
So what we’re talking about today is taking money out of that property, going the wrong direction and adding to the debt according to what you owe on the property. So is that a good idea? Was that a part of the downturn last time. It’s a piece of the downfall of the mortgages of 2005, 2006, 2007, that we don’t talk about a lot.
But the craziest thing is, in addition to lenders wanting to make loans at all costs, so going to lower credit scores, requiring less documentation, going to higher loan to value. You could do cash out to 90%, 95%, a hundred percent at very little of a premium to what a normal 30 year fixed rate was because lenders wanted loans. Wall Street wanted loans that bad.
So it’s different now that you’re going to be very limited. And we’re going to talk about that depending on where you go to get a second mortgage. Now, if you’re looking at a first mortgage, very difficult to get more than 80 percent of your home’s loan to value. Which is still an aggressive number.
We’re talking about wanting to arrive at retirement with a freedom point of not having a mortgage and having that portion of your home free and clear, It’s going in the wrong direction. But what are reasons that we would want to do this? Many people find themselves house rich and cash poor with a valid need for money.
It could be for a child’s college education. We can also debate whether that’s a good investment[00:06:00] and use of your funds, but it’s valid. We could add on to the home. We can renovate the home. Those fall into sort of a unique category in that you’re not going to get a dollar for dollar return on them but you’re going to get increased enjoyment out of your home, and you are going to get some return on that money in terms of being able to increase the value of your home.
So in a perfect world, we are not doing this. We often don’t live in a perfect world. And what I want to make sure with my clients is, we’ve exhausted all options. This is the only option or the best option. And that this option fits within the overall plan of, okay, I’m 49 years old and I have these expenses that I have to account for. And I want to retire at 65 or 68 or 70. How do we still get ourselves to the same finish line?
And Jeb, there’s some variables inside of that, that we don’t know. We believe that at some point rates are going to go lower. So a lot of these second mortgages will get refinanced into a new first, if rates go low enough. We’ll touch on that when we get into the idea of blended rate and when that makes sense.
[00:07:08] Jeb Smith, Huntington Beach Realtor: Well, I think that’s actually a good point to jump into right now. So let’s talk about when it’s a good idea to do a second mortgage versus the idea of refinancing? So a lot of people know about refinancing, taking your current first mortgage and replacing it with a new mortgage. Or taking a first and second, replacing it with a new mortgage.
But when does it make sense to say, you know what, I just want to keep my first mortgage in place because I have this super low rate and do a second? Sometimes that super low rate makes sense to refinance, believe it or not, based on the blended rate. So maybe talk about the two.
[00:07:38] Josh Lewis, Certified Mortgage Consultant: Absolutely. So I would say more than half of the people that I talked to about this, just say, “I’ve got a 2.75% rate. I got a 3.125% rate. I don’t want to give that up.” And we say, well, we got to look at your blended rate. And off the top of my head, probably you’re right. It doesn’t make sense to touch your first mortgage. But in other situations, it absolutely does make sense to touch that first mortgage.
So let’s look at an example near and dear to your heart. You have a very low loan balance relative to the value of your home. So $476,000 at 3 percent interest. So you’re looking at buying a new home. One of the best ways to come up with that down payment without tapping your other assets would be to do a second mortgage, a HELOC. Plus or minus that rate’s going to be at 10%.
So if we want to take $300,000 as a down, that’s a big number. We never thought we were going to hear any numbers, first or second mortgage that we’d be looking at close
[00:08:31] Jeb Smith, Huntington Beach Realtor: and it’s an adjustable rate. So if prime goes up that 9.875% now becomes 10 and an eighth or whatever based on, on where prime goes. So we’ll talk about that here in just a minute.
[00:08:42] Josh Lewis, Certified Mortgage Consultant: We’ll talk about that. And let’s kind of talk through this. Cause you just threw that one at me last night, but let’s, let’s circle back to that because I think it’s an important discussion that will help listeners here. So let’s talk about that and how it varies with what you could do in terms of a fixed second.
So if we look at that, the two options there, $476k at 3%, [00:09:00] $300,000 at 10%, the blended rate there is 5.7%. So what would the rate be on a new first? Best case scenario, 7%. Likely to be somewhere closer to seven and a half today. So it’s pretty easy decision. You’re the one making the decision, Jeb, is there any world where you think of giving up the low rate on the first.
[00:09:17] Jeb Smith, Huntington Beach Realtor: No, I mean, not unless I sell the property entirely. We can jump into that conversation in more. Let’s maybe save it to the end and kind of the decision making process here.
But no, if I’m pulling cash out of the property, the home equity line is by far in a way that the best choice in this scenario because of where the blended rate is.
[00:09:35] Josh Lewis, Certified Mortgage Consultant: Let’s look at another example. And I almost want to go two different directions with it. I have a client that we did a hundred thousand dollar refinance when rates were super low. So I think they’re at like. 3.125%, something like that. And they’ve been aggressively paying it down. So they owe $68,000 on their first mortgage.
They need about $75,000 right now for an investment. They had some unexpected medical expenses that came up and one of them was outta work, so they ran up credit cards.
So it’s like, okay, we don’t wanna give up that first, we wanna take a second. So 68,000, call it 3%, 75,000 at 10%. That’s a blended rate of 6.671%. That starts getting really close. We’re saying, do I want a variable rate on the second? Do I want two mortgages? Do I want to simplify this and go to one loan?
So we presented them both options and for them, they do want the second mortgage. Now let’s say that their financial issues were larger and they needed to do a bigger loan. If they needed $150,000 second, that blended rates going to be up over 8%. And we say, yeah, you don’t want to give up your great rate on the first mortgage, but the most important part is how much do you need to borrow first and second? And what is your overall blended rate on that?
So it’s important that the lender that you’re working with walks you through that. This is truly a case where the numbers never lie. When you see them, you are probably going to go, I want that, or I want that. And there’s not a whole heck of a lot of debate there.
[00:10:52] Jeb Smith, Huntington Beach Realtor: No. And I think that’s going to kind of jump us into the next conversation here, which is talking about, pros and cons of home equity lines, because one of the advantages of an equity line is that it is based on a variable rate. And a lot of times I think I’m almost a hundred percent of the time it has to do with the prime rate, right?
Which means every time that the Fed hikes the rates, which they’ve done for 12 times over the last 18 or so months, that home equity line has gone up, right? Versus the idea, if we think we’re at the peak in rates or close to it, there’s an opportunity for the Fed to pause and, or start to reduce that Fed funds, right? Maybe a year from now, six months from now, hard to say.
But as they reduce, guess what? It also reduces the payment that you’re paying on that home equity line. So now, instead of paying more, you’re actually paying less. And that’s something, depending on how risk averse you are, um, or risk tolerant rather, you decide, Hey, if you think you’re at the top, maybe the equity line is the right move because there’s an opportunity for that payment to come down.
But Josh, let’s maybe back up just a minute here and talk about some of the pros of an [00:12:00] equity line, and we’ll talk about the cons and then we’ll compare that to a fixed rate second mortgage that has very little to no, I wouldn’t say risk, but compared to the equity line, a little bit, you know, um, less worrisome.
There’s more certainty. Yes, absolutely.
[00:12:17] Josh Lewis, Certified Mortgage Consultant: So what is the benefit of the HELOC? So it is a line of credit. So people will come to me and say, Hey, we need X today. We think we’re going to need X in six months and we might need a little bit more. So with the line of credit, the cool thing is you’re only paying on what you actually borrow.
So if you go get a $300,000 line, but you’re like cool, I’m going to do that because that still only takes me to a 60 percent loan to value and I can get excellent terms, but I need $50,000. I’m just getting the extra to have it there in case of an emergency. There’s a benefit to that. You are only going to pay on what is outstanding.
You can borrow against it and you can pay it down. It’s interest only during the draw period. So it’s important to make a distinction there. These are generally done for 30 years. Some lenders will do them for 25 for the first three to five to 10 years. It’s an important detail you need to get from your lender. That is the initial draw period.
That’s the period where it acts like a credit card, borrow, pay down, borrow, pay down, borrow, pay down. After we get to that end of that draw period. Now we have a repayment period. If we go back old school, 15 years ago, almost all of them were 10 year draw period, 20 year repayment, maybe a 15 year repayment. But the interest only period was the draw period.
For 10 years, you were only required to make an interest only payment. So they had a very low monthly payments, relative to what you’re looking at on the fixed, which is going to also principal and interest.
So it’s important for you to find out when you’re talking to someone about the loan, what is my draw period? What is my interest only period? And then what is the repayment period? Because that dictates how your payment is going to be calculated for qualifying.
It’s an interesting quirk with the home equity line of credit because that repayment period is much shorter than the total loan period. Because after the snafu of 2008 lenders are much more conservative in how they qualify you, they’re going to add a buffer.
So whatever your start rate is, they’re going to add a couple of percent to that. And instead of amortizing that over 30 years, they’re going to amortize it over 20 years. So your actual payment is going to be relatively small. Your qualifying payment is going to be very large.
So in a perfect world, most people that I’m talking to like the idea of a HELOC because they don’t know how much money they need. They don’t know when they’re going to need it. They are opening up a line of credit that they can access and that they can use over time as needed.
[00:14:44] Jeb Smith, Huntington Beach Realtor: So, I mean, we’ll go back to Jeb for an example, right? So me, the idea of a home equity line in the example that we’ve used earlier is say pulling out 300,000, that gives me 20 percent down on a $1.5 million purchase where I’m not having to sell the current [00:15:00] residence.
So it has the $467k, $476k, whatever that balance is on the first, we add three to it, 376, 367, whatever the number is there again. The additional equity stays in that property. I’ve now taken a portion of equity, used it to buy the next home.
So I’ve kept one home as an investment property with the idea that it would cashflow in this case, it’s not going to be upside down a little bit. And now I can buy the next home that we need in our life because of growing family and all those things. And I’m going to have a much higher payment because I’m not taking all of that equity out of the property and putting it into the new property. And so therefore there’s decisions to be made.
In the example that Josh was giving a minute ago, talking about interest only versus not in, in the example of a $300,000 mortgage, interest only versus not, it’s, in my eyes, minimal. It’s like $150 bucks a month difference in paying the interest versus paying the principal on that loan. Kind of irrelevant, but for some people, maybe that makes a big difference in the decision process.
So I stepped back and I go, yes, the idea is great. Yes, I think we’re at a peak in rates, but for me, because the property on the other side doesn’t cashflow, I’m to the point where I think, okay, that property has to be sold. All of the equity has to be come out to buy the new property in order for me to make sense of the payment, because I don’t want a super high mortgage payment.
And so again, I know we’ve kind of gone off on a tangent here, but these are the things that you have to consider when you’re using it for the things that we’re talking about here. The other option is that we stay in the property that we’re in now. And we do an addition to that property, which again, is not going to need $300,000 on an equity line.
But again, I could pull cash out of that property, maybe a little bit more than I think I need. Use what I need to do the addition, have some in there for other improvements or not, and then if that three year period goes by and I haven’t used it, it’s gone and I’m just paying on essentially what’s been used at that point.
So these are all the things that you need to factor in there. So Josh, I kind of mentioned some of the cons there in, in the process, but you know, let’s talk about index, margin, how these things are calculated, how they can change because I think that’s an important piece of the puzzle, that’s not really explained.
People just get a rate and they think that’s my rate. Well, it is, but it’s not. And so I think that’s an important factor in the decision making process.
[00:17:27] Josh Lewis, Certified Mortgage Consultant: Well, better yet, let’s start with the idea of a teaser rate, because a lot of banks and credit unions will have an introductory rate for three months, six months. So you hear, hey, I’m getting a 6 percent rate. You’re like, oh, cool. I can deal with that.
That’s not your actual interest rate. When you get to that first adjustment period at the end of the three or six months, you’re going to get the index plus the margin. So 98% of all home equity lines of credit are tied to the prime rate.
We talk all of the time that the Fed does not control mortgage rates. They do control the prime rate when [00:18:00] they hike prime rate goes up. When they cut, prime rate goes down. So with that, in terms of watching your HELOC, you can know what’s going to happen by following the Fed.
We have a Fed meeting today, Jeb. It’s expected they will not hike. And the debate is they may have one more quarter point hike in them and the market consensus is that’s the end of it. So in terms of interest rate risk, your margin is fixed, but the index moves.
So the index being prime rate dictated by the Fed, the lender is going to add a margin. That’s just where they want the interest rate to be. Now going back in time, I did a HELOC for my Dad in 2004. Perfect credit, low loan to value. He got prime minus 1%. Those days are long gone. No one does a negative. No one does a negative margin anymore. Even the best borrowers are going to be looking at plus a half plus one plus two.
[00:18:53] Jeb Smith, Huntington Beach Realtor: Well, let’s use me for an example, right? So, so if, if prime rate today is five and a half percent. I was getting a 9.875% percent home equity line. So what’s that? A four and three eighths margin on top of prime.
[00:19:07] Josh Lewis, Certified Mortgage Consultant: Well, that’s the Fed funds. Prime’s actually eight and a quarter. So prime prime is higher. So you’re looking at like a 1.625% margin. And we can get that lower. It’s just, we were trying to do it at no cost.
So say like your best case scenario, if you found the greatest credit union on the planet, they’re probably at a half to one above prime. Most prime borrowers are somewhere between one and 2%, depending on how they want to structure everything in terms of the costs.
And if you have a lower credit score, if you have a higher loan to value, you’re trying to go to 90%, you could easily, I have a lender that will do lower credit scores down to 640. That does require a much lower loan to value, but they’ve got margins of 4.5-5%. So those borrowers are up at like 12 and a half, 13 percent on their interest rate. So if you thought the close to 10 was rough, much, much worse when you’re looking at 12 and 13%.
So it’s variable. It can go up over time, but you need to know what your index is. It’s very likely to be prime. You know what your margin is that you’re going to pay on top of that. An important thing is caps. So with a normal adjustable rate mortgage, they have a cap every period. Most HELOCs like, I don’t know, I’ve ever seen one with any caps.
They have a lifetime cap, which hold your breath it’s 18 percent on nearly everyone I’ve ever seen. And periodic caps, they adjust every month. That doesn’t mean they will adjust every month. They can adjust every month, depending on what happens with your index, which is likely to be prime, as we said. But that could go up and there’s really no limit to how much it can go up.
You saw over the last year, it’s a big deal for the Fed to hike 50 basis points at one time. So that is effectively a limit, but we had 525 basis points over the last year. So going back to what I said earlier, had people last year saying I’m taking out a HELOC. They’re super cheap. I said, yeah, but we know the Fed is going to start hiking and hiking very aggressively.
So they’ve seen a five and a quarter percent [00:21:00] increase in their rate over the last year. If they had taken a fixed second, they would have had no increase in the rate over the last year. So now let’s flash forward to making a decision today. We’re almost on the flip side.
And in your situation, Jeb, I have a lender that we need to price out today for you. I would say we could do a fixed second under 9%. Is it going to be a hugely under nine? I don’t know. But let’s look at that. It’s a fixed repayment period, no interest only option. On that size of a loan, that’s a decent size difference in the interest rate, but you are saying I’m signing on for the life of that loan at let’s just call it 9%.
Whereas taking the HELOC, if we think that the Fed over the next two, three years is likely to cut a couple of hundred basis points. Now that rate is down into the sevens, which the fixed is not going to be there. So the positives of the fixed rate are certainty. You don’t have to worry about your interest rate going up.
You know what your payment looks like. You’re not going to get to the end of that drop period and now enter a repayment period. And the payment goes way up from that interest only payment. So you’re getting certainty. The downside of it is you have to take all the money now, whether you need it or not.
And that’s really the big downside to it. In addition to the fact that if we think we are at or near a peak in interest rates, it’s a fixed rate and you’re not likely to be able to ride it down like most HELOC borrowers are going to right now.
[00:22:28] Jeb Smith, Huntington Beach Realtor: No, it’s a good stuff. So, I think we’ve kind of dug into the reasons that people would consider them, the basics of how they work. Let’s talk about what goes into it, Josh. What is required? Credit scores. Let’s talk about documentation. Let’s talk about cost, they’re not free for most people. So I think that’s a big point. You still got to qualify for these, right? Even though you have the equity. So I think that’s, that’s probably the next step here to talk about.
[00:22:54] Josh Lewis, Certified Mortgage Consultant: Absolutely. If you’ve been here any period of time, I will generally tell you shop around, make sure you talk to a broker. A broker on a first mortgage will generally get you lower rate, lower costs. You can get good loans from every channel and good terms from every channel, but that’s a generalization.
Now, when we’re talking about these loans, going direct to the source will generally get you the best terms. And what does going to the source mean? A bank or a credit union that is loaning their own money in a second position.
So the positive thing is the best terms. Whether that means lower interest rate, lower margin on a HELOC, lower closing costs, those can all be true.
The downside to it is they’re underwriting guidelines to begin with are gonna be more conservative. Many of them will not go over 80%. If they go over 80%, kind of the benefit of the lower terms or lower rates go away.
But with that you can go to 80% loan to value on a second mortgage with nearly every lender. There are some banks and credit unions that are more conservative, especially if it’s not a primary residence. Other options. If you go to a broker, we have options to 90 to 95%. Again, if we said it’s aggressive going to 80 or 90, probably don’t want to go to [00:24:00] 95. The terms are going to be ugly, but if you had a need to, it is out there.
So in general, if you can keep it to 80 percent or below, it’s going to get you the best terms. You can go to 90, possibly 95 if you’re willing to pay a premium.
Credit score wise, again a big range. A lot of banks won’t go below 700. Won’t go below 680. So they’re offering the best terms, but many of the borrowers that need money to do debt consolidation, to pay for an unexpected expense, had some medical issues, they’re not going to have that perfect credit score.
So we have options all the way down to 640, 620. And we have private money options that will go even lower than that. So, depending on your equity situation, the lower your credit score, the higher the rate is going to be and the more conservative the lender is going to get on how much of your equity they’re going to allow you to borrow.
So in a perfect world, you have an 800 credit score and you have all the options in the world available to you. But we don’t live in a perfect world. Wherever your score is, you need to talk to someone to see what all those options are. And don’t just walk into your bank or your credit union. They tell you, Hey, sorry, your credit score is not good enough. You don’t qualify.
Because there are lenders all over the spectrum and it varies, I would say more so than it does with first mortgages. So it’s important to check multiple sources.
[00:25:15] Jeb Smith, Huntington Beach Realtor: Josh, I know we’re going to dive into where to find lenders that do second mortgages here in just a minute.
But if you’re listening to this, there’s a link in the description below that will refer you to a lender nationwide that does second mortgages can guide you through the process can show you blended rate, compare loans, help you make the decision, whether or not it even makes sense.
Right. Josh is the kind of lender. Like if it doesn’t make sense, he’s going to tell you, it doesn’t make sense to do it and that you should consider something else. So if you need a lender like that, do me a favor and check that referral link below.
And also if you’re listening to us on audio, you find any value in this video at all, do us a favor, rate us, review us. It helps when you know the reviews are up, it pushes it out to more people, and if you’re listening on YouTube, you can help us by hitting that thumbs up and following the channel as well.
So Josh, I know you were going to dive into documentation. So, you know, what kind of documents are needed?
[00:26:04] Josh Lewis, Certified Mortgage Consultant: The biggest or the first question that I get is, well, do we have to have an appraisal? How does the appraisal work? Any first mortgage, we talk about appraisal waivers with Fannie Mae and Freddie Mac, but it comes out of the black box that is their automated underwriting system.
Most lenders on the second, it’s going to be hard and fast. They’re going to tell you, are we open to an AVM, which an AVM is basically a fancy paid expensive version of what Zillow and Redfin do in terms of an estimated value. So for the low loan value, you have good credit. I’m not getting a loan over $250,000 or a line of credit over $250,000, very good chance that we don’t need an appraisal and can get away with an AVM.
Now, in terms of the documentation, we don’t really get into assets as much on this. There are some lenders out there that want to see reserves and want to see your financial position, but we’re primarily focused on income. So we’re going to get the same income documentation we do on a first mortgage.
If you’re an employee, paystub W 2s. A lot of times on conventional loans, we can get away with [00:27:00] one year. Many of the second mortgage lenders are going to require two years. So think in terms of two years, a one month paystubs, two years of W2s. two years of tax returns, personal and business, if those exist.
And again, it gets back to a point where if you have a complex situation, I will readily admit the best terms available are from banks. A lot of the second mortgages that I am doing are for people either lower credit scores or complex income situations because the lenders, the banks and credit unions with the best terms available have the most restrictive guidelines.
But then on top of that, they have restrictive underwriting. Whether that’s just not understanding complex situations or not having a risk tolerance for seeing a complex situation in your favor, it’s just more likely for that loan to get turned down. So where does that also lead us? If you’ve ever dealt with a bank or a credit union, they are not fast.
You’re probably talking 30 to 60 days to get your HELOC done. My best HELOC lenders can get them done in 30 days. My most flexible is probably also looking at 45 to 60 days. So this is all over the place in terms of timeline. So talk to your lender. Hey, how many of you closed with this source? How confident are you of my situation? Are we going to get an AVM where we don’t have to wait for an appraisal, all of that stuff.
And they can tell you. So hopefully it’s not an emergency where you need money in two weeks, but the best lenders out there on HELOCs can close them as fast as two weeks. You’re probably looking 30 best case, 60 worst case with most lenders.
[00:28:27] Jeb Smith, Huntington Beach Realtor: And then what are we talking about when it comes to closing costs? Are there costs involved in refinancing? How does that part of it work?
[00:28:34] Josh Lewis, Certified Mortgage Consultant: So again, a lot of the banks and credit unions, they don’t really have an origination cost because they have bank employees doing this. So the downside is they’re not necessarily mortgage experts. They’re not really good at guiding and advising, but they get their hourly wage. They get their salary and there’s not a cost to that.
So it can go all the way from banks and credit unions saying we don’t charge anything to looking at you know, a couple thousand dollars in fees plus an origination fee with a lender, depending on how they’re paid.
So remember, if the average first mortgage, I had the number, I think average first mortgage is $378,000 in the U S right now. If a lender makes 1 percent on that, it’s $3700. It’s a nice profit. Well, if you’re getting an $85,000 first mortgage, they would have to make four points to make an equivalent amount.
So they’re not going to, but realize these are thin deals. So there are a lot of lenders that just say it is not worth it. We cannot profitably do these. So if you have a hairier situation, a more difficult situation, you could look at up to a couple thousand dollars in costs.
Title, you still are going to have some type of a title policy. You’re going to have some type of an escrow function there. They’re discounted. They’re kind of junior policies, limited escrows. So depending on if you need an appraisal, I would say anywhere from free to $3000 in a worst case, in terms of your closing costs.
And depending on what you want to do with the rate and fee structure, you could pay points on top of that. A lot of it is going to [00:30:00] come down to credit score, how complex your file is. And are we going to a high loan to value or not?
[00:30:07] Jeb Smith, Huntington Beach Realtor: And something we often talk about is getting comparisons when getting a loan quote. So, you know, talk to a broker. Use that link below. But also talk to your bank, who you bank with and see if it’s comparable, see if they’re able to answer your questions and guide you in what we’ve talked about today. Those are all important factors, right?
Yeah, you don’t necessarily need an expert most of the time, but this is again, a financial transaction that typically deals with large amounts, and so you want to make sure that it’s done correctly and in a timely manner and that there’s no unforeseen things coming up, especially if you’re using it to buy another property or there’s it’s time sensitive at all. Because those are really important things that you need to nail down.
So, Josh, you know, one of the questions I think a lot of people have, or I had initially with this, how do people get the money? If it’s a equity line and I don’t draw on it initially, I’m just getting it for safety reasons because I’m going to do a project in six months. Am I just writing a check? Is there a credit card? How does that whole thing actually pan out?
[00:31:07] Josh Lewis, Certified Mortgage Consultant: Most of them will give you both. Or ask you at closing, which you prefer. Here’s a credit card that you can have charges. If you’re getting it from a bank, let’s say you get it from Wells Fargo. You can go into a branch and they’ll hand you a cashier’s check. Or you can go online and say, Hey, my line of credit has a zero balance and a hundred thousand dollar limit, I would like $50,000 transferred over. Cash today, but no, they will literally transfer it over or you can have it wired.
[00:31:32] Jeb Smith, Huntington Beach Realtor: Do you show a gun when you ask for it?
[00:31:34] Josh Lewis, Certified Mortgage Consultant: It’s not robbery. You are actually having to repay the funds. So the no gun is required. They’re happy to profitably.
[00:31:41] Jeb Smith, Huntington Beach Realtor: It’s highly encouraged not to bring a gun into the bank.
Okay. So I think we nailed down a lot of the important things here, Josh. Any, any tips for people looking to get a second mortgage? What should they be thinking about? I know we’ve kind of dove into a lot of information here, but what are the key takeaways?
[00:31:57] Josh Lewis, Certified Mortgage Consultant: If you have a very simple situation and you have good credit, simple income, low loan to value, a bank or credit union is probably going to do a great job for you. And I should say, and you have the time to deal with their processing times.
If you have a complex situation. You need some understanding in terms of what your income looks like. You’re a business owner and you need to do a bank statement program. All of those exist. Literally every option that we have, I shouldn’t say every option. Cause I don’t know that we have like a DSCR investment property HELOC, but most of the options we have available on first mortgages, we also have available on second mortgage.
And me as a broker, I would say most of the people that I’m talking to are kind of in that middle place. They’re well qualified. It’s not hard for us to place these loans, but they go into the bank and the bank teller’s eyes glaze over and just doesn’t understand their situation or says, Hey, credit score doesn’t quite meet our requirement or Hey, the loan to value is a little bit too high.
So realize that there is a solution for nearly every situation assuming that you have a credit score 640 or higher, and you have a chunk of equity in your [00:33:00] property. If you have a super low credit score and you’re looking to go to a super high loan to value, it is not going to happen. There’s too much risk to the lender in that situation.
They are looking at your history of repayment. And how much equity is in the property if for some reason you don’t repay them. But for most borrowers, there is an option out there
[00:33:16] Jeb Smith, Huntington Beach Realtor: And I think we’ll end on saying home equity lines, second mortgages are a great way to access equity to do things like debt consolidation, home improvement, purchasing other properties.
It kind of gives you that advantage to leverage a little bit more, but it’s not always the right solution. Right? Here on The Educated Homebuyer, we’re about providing detailed information, but also kind of giving you both sides of it. And so it’s not always the right answer, not always the best decision.
So just make sure when you’re doing it, you’re weighing all of your options, talking to lenders, getting different variables and ultimately making the best decision for yourself when it’s the right time in your life. Right now might not be the best opportunity. You know, as rates improve, maybe that gives you what you need to stand on.
So with that said, Josh, final words?
[00:34:04] Josh Lewis, Certified Mortgage Consultant: Have a purpose. If you’re interested in looking at a second mortgage, have a purpose, have a goal, make sure that the second mortgage fits within your plan for long term financial freedom. It’s generally used to spend money, but make sure that that’s wise spending on home improvements and investment in yourself or your kids in terms of an education and do the right thing.
Home equity is an asset. Sometimes we need to allocate those assets different ways and you have a lot of options. In a perfect world, we would take out one 30 year fixed mortgage, possibly refinance it to lower rates along the way and pay it off as quickly as possible and arrive at mortgage freedom.
It’s not always possible. The real world hits and things happen and we have to pay for them. This can be a good option for taking care of that. Make sure you’re talking to an expert advisor who can give you the advice and guide you and help you make the best decision for you and your family.
[00:34:53] Jeb Smith, Huntington Beach Realtor: With that, I’ll leave you with our quote, Buy Right, Borrow Smart, Build Wealth!
Until next time, adios
[00:34:59] Josh Lewis, Certified Mortgage Consultant: Amigos!
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