With mortgage interest rates rising rapidly, now may be the time to refinance your variable interest rate home equity line of credit (HELOC) or adjustable rate mortgage (ARM) home equity loan into a fixed interest rate second mortgage. Otherwise, your payments may exceed your capacity, which can be dangerous because your HELOC is secured by the equity in your home.
Refinancing your existing home equity loan or line of credit can save you a lot of money in the long run. There are many places where you can get a second mortgage loan at a fixed interest rate. These tips can help you keep your costs down and may help you avoid unpleasant surprises at closing.
First, get your credit report from all three credit reporting agencies and check it for errors. An inaccuracy you aren’t aware of could cost you thousands of dollars in additional interest or even deny you credit.
· Find out what the current mortgage rates are and whether they are going up or down. Knowing current mortgage rates will give you bargaining power when you shop for your new loan.
· Talk to your existing lender about mortgage refinancing for your home equity line or variable interest rate 2nd mortgage. At the same time, contact at least one bank, one credit union and one direct mortgage lender. Their second mortgage loan costs may be lower than finance companies and mortgage brokers, and one of them may be able to get you a better deal than your current lender.
Most lenders will give you a loan of up to 85% of the value of your home based on the sum of both the first and second mortgages. Stay away from 125% value-to-value (LTV) second mortgages or any other loan that allows you to borrow more than your home is worth. Mortgaging your home for more than it’s worth is an easy way to lose it.
The other problem with 125% LTV loans is that you may not be able to claim all the interest paid on the loan. According to the Internal Revenue Service (IRS), there is a limit on the amount of loan that can be treated as a home equity loan. The total home equity debt on your primary residence and second home is limited to the smaller of the following:
– $100,000 ($50,000 if married filing separately),
– Aggregate fair market value (FMV) of each home minus the amount of its home acquisition loan and grandfathered loan (but not below zero).
Interest on the amount that exceeds the home equity loan limit is generally treated as personal interest and is not deductible, so you can take advantage of a tax deduction if you mortgage your home for more than its value. might lose.
Find out what you will have to pay in terms of points and charges. Remember, 1 point equals 1 percent of the loan amount (1 point on a $10,000 loan is $100). Reputable lenders typically charge between 1 and 3 percent of the loan amount in points and fees. If the points and fees exceed 5 percent of the loan amount, you should probably shop around for a different lender.
Find out whether your new loan attracts default penalties in case you make late or missed payments. The interest rate can increase dramatically due to the default penalty.
Before applying, pay close attention to the terms of the loan, including the type of second mortgage, presence of prepayment penalties, balloon payments, lower or higher down payments, mortgage insurance requirements, payment schedules, lock-in periods and other loan features. Are the terms better than yours? If not, keep shopping.
· Know your legal rights. The Federal Reserve Board says that if you’re using your home as security for any type of home equity loan, including a second mortgage, federal law requires you to close the deal after you’ve signed the loan documents. Gives three business days to cancel–for any reason–without penalty. You must cancel in writing within three-business-day time, and refund any funds you paid to the lender.
