With mortgage interest rates rapidly rising, 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 could become more than you can afford, which could be dangerous because your HELOC is secured by the equity in your house.
By refinancing your existing home equity loan or line of credit you could save a lot of money in the long run. There are many places you can find a fixed interest rate second mortgage loan. These tips can help you keep your costs down and help you avoid unpleasant surprises at closing.
· First, order 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 extra interest or even cause a denial of credit.
· Find out what current mortgage rates are and whether they are going up or down. Knowing the current mortgage rates will give you bargaining power when you shop for your new loan.
· Talk with your existing lender about mortgage refinancing of 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 2nd mortgage loans probably cost less than ones from finance companies and mortgage brokers, and one of them could possibly give you a better deal than your existing lender.
· Most lenders will loan you up to 85% of the value of your home based on the total of both the first and second mortgages. Steer clear of the 125% Loan To Value (LTV) second mortgages or any other loan that allow you to borrow beyond the value of your home. Mortgaging your home for more than it is 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 of the interest you pay on the loan. According to the Internal Revenue Service (IRS), there is a limit on the amount of debt that can be treated as home equity debt. The total home equity debt on your primary residence and second home is limited to the smaller of:
- $100,000 ($50,000 if married filing separately),
- The total of each home's fair market value (FMV) reduced (but not below zero) by the amount of its home acquisition debt and grandfathered debt.
Interest on amounts over the home equity debt limit generally is treated as personal interest and is not deductible, so you could lose the tax deduction benefit if you mortgage your house for more than it is worth.
· Find out what will you have to pay in points and fees. Remember, 1 point equals 1 percent of the loan amount (1 point on a $10,000 loan is $100). Reputable lenders normally charge between 1 and 3 percent of the loan amount in points and fees. If points and fees are more than 5 percent of the loan amount, you should probably shop for a different lender.
· Find out if the new loan carries a default penalty in case you are late or miss a payment. Default penalties could cause the interest rate to increase dramatically.
· Before you apply, pay close attention to the terms of a loan including the type of 2nd mortgage, the presence of prepayment penalties, balloon payments, low or high down payment, mortgage insurance requirements, payment schedule, lock-in period and other loan features. Are the terms better than yours? If not, keep shopping.
· Know your legal rights. The Federal Reserve Board states that if you're using your home as security for any type of home equity loan, including a second mortgage, federal law gives you three business days after signing the loan papers to cancel the deal--for any reason--without penalty. You must cancel in writing within the three-business-day window of time, and the lender must return any money you have paid to date.
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