home equity loan--good or bad

[panski master]

My wife said we should get a home equity loan to finsih our basement. Our home is four years old so we should have some equity built up. What is the process in getting a loan for $7000-$10,000? Does this loan get added to your original mortgage or do you have a separate payment. I plan on doing most of the work myself except for the electrical/plumbing so I will be able to save on some of the labor costs. Any input would be very helpful. Thanks. KK

[DOAducks]

panski- you will have an additional payment each month.

[Bobby Bass]

You might be surprised at how much equity you have in your house as almost all of your house payments in the first few years goes to interest. Unless your house has gone up in value you might not have that much. A equality line of credit will let you do anything you want with the money and also let you use it over again as you repay it. It will be a second loan against the house. Shop around, that goes with out saying.

[Double D]

Panski,

Bobby Bass is right. Depending on where you are don't bet on a lot of equity in just four years - the housing market has flattened in some areas. It depends more if you had a decent down payment when you bought the house. If you took out a 100% loan you won't have enough equity to borrow back for a few years.

DD

[gundy89]

Like those guys said, it's an additional loan that you make payments to. It works like a credit card in that you only have to pay interest on what is borrowered. So in theory, you could have a $150k Line amount, owe $10k, and only pay interest on the $10k. Typically, the rates are based off of the prime rate (8.250%)and is variable. They're cheap and easy to set up. They'll take a little over a week to set up and the documentation required is dependent on your Loan to value (what you owe divided by what its worth). Any other questions let me know.

[18 inch Crappie]

Plus you can right off the interest on that type of loan

[Justfishing]

Good or Bad-- Depends on your needs. Compared to a 1st mortgage they will carry a higher interest rate. It will also have a shorter payoff 10-15 years. Like any mortgage they offer a tax deduction.

If you get a HELOC or home equity line of credit you can tap it like a credit card but it will also carry an adjustable rate. It will also make it easier to tap your equity for foolish spending. Personally I dont like anything that has an adjustable rate. At this point interest rates have only one way to go and that is up.

HELOC's and second mortgages are easier and less costly to get. Less costly as in appraisal fees, title insurance,etc.

A new first mortgage would carry a lower rate than either equity option. If current interest rates are lower than your existing rate and you plan on being in the home for a while then you might consider a refinance.

Another thing to consider is PMI private mortgage insurance. If you have it on your current mortgage you may be able to get it dropped due to appreciation and the value you will add with the basement finish. If refinancing you would have to consider if the larger loan would require PMI.

There are a lot of variable to consider. Loan officers are in a sales position and will steer you to do something that makes them money. It is up to you to figure out all the options and deciding what is best for you. Loan officers rank right up there with lawyer and car salesmen.

[gundy89]

Just fishing,

I don't think I'd go that far with Loan Officers. Yes, they're commissioned, but a good Loan Officers will give you your different options and help you to decipher which makes the most sense. Yes, a first mortgage costs more than a second, however with the lower rates, it may make more sense. It also depends on how long you plan on keeping the loan. In the short term, more often than not, your better off with the cheaper up front cost seconds.

Yes, there are bad Loan Officers out there, but there are also bad CPAs, Real Estate Agents, Financial Planners etc.... You need to interview any professional #1 and make sure that not only do they know their business, but that you can work with them to achieve your long term goals.

[Bigeye30"]

One thing to always consider when thinking about refinancing, second mortgages, Borrowing against the equity etc etc. is that most people never calculate in the costs of selling if something were to ever happen that would make them sell before a targeted date. I see this quite a bit, the seller has done a refinance and borrowed everything that the appraisel allowed. However when you go to sell and your mortgage amount is right at market value, your backwards once you calculate in closing costs. Today's real estate market is more competitive than ever before and homes that are overpriced by the smallest amount are sitting and sitting. So heres what I tell my clients, if they are ever going to refinance then get ahold of me so I can calcualate what there home would sell for and what they would end up with so there not backwwards should they need to sell. Just something to consider. Good luck with the project

[Double D]

Thanks gundy89. All loan officers are not commissioned, outside of the metro I would say the great majority are not. Yes, I am one, and it looks like a couple others are too.

Read your disclosures, watch your costs and you will be fine. HELOC's are a great tool but obviously don't fit every situation. Visit with your lender thoroughly.

DD

[Justfishing]

Quote:

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Just fishing,

I don't think I'd go that far with Loan Officers. Yes, they're commissioned, but a good Loan Officers will give you your different options and help you to decipher which makes the most sense. Yes, a first mortgage costs more than a second, however with the lower rates, it may make more sense. It also depends on how long you plan on keeping the loan. In the short term, more often than not, your better off with the cheaper up front cost seconds.

Yes, there are bad Loan Officers out there, but there are also bad CPAs, Real Estate Agents, Financial Planners etc.... You need to interview any professional #1 and make sure that not only do they know their business, but that you can work with them to achieve your long term goals.

---

I deal with the lending industry and see lots of problems with commisioned loan officers so I stand by that statement. Yes there are many good LO's but there are as many bad.

Being commissioned they may try to get you into what they offer. Particularly now when they are scrambling for work. In my market over 30 lenders have closed since last year. There are probably still to many lenders given the lower volume of loans being made.

It is up to the consumer to learn what loan product are out there and to find the right one that meets their needs.

There are a lot of factors to consider. It they bought or refinanced in the last 4-5 years they may very well have a rate as low or lower than what is being offered today. In which case a equity loan is likely the best option. Why is that- because of the high cost of fees may exceed the interest rate savings.

The appraisal for a new 1st mortgage would not include the basement finish not completed. Combine that with a higher loan amount and a possible decrease (some areas saw value declines in 06) in value might kick in the need for PMI that is mortgage insurance. An added cost not in the interest rate or APR.

A home equity loan although carrying a higher rate would be for a much smaller amount than the combined mortgage. A borrower should weigh the cost of this loan against all the added cost of a new 1st mortgage.

After a borrower knows all the costs then they can determine the best type of loan and search for the best terms whether it is an equity loan or new 1st mortgage. It is a very confusing process and takes some research and knowledge. It is also a good idea to be skeptical of lenders. If you read Bob Bruss you have heard of many of the unethical tricks that are employed by lenders to squeeze money from borrowers.