Home Equity Loans and Home Equity Lines of Credit

If you have been wanting to spruce up your kitchen, bathroom or any part of your home and you don’t want to touch your low interest rate on your existing mortgage, a second mortgage could be an option worth considering.

Right now, with the high appreciation in home values we’ve seen in the greater Seattle area, many homeowners have a significant amount of equity. Instead of refinancing, this equity can be accessed by obtaining a second mortgage which could be a home equity line of credit or a home equity loan.

A home equity line of credit (aka HELOC) is a credit line where a homeowner can pull out various amounts of cash (depending on the size of the equity line and of course the terms). The interest rate typically varies and is often based on the Prime rate. As I write this post (early July in 2022), the Fed has been increasing the Fed Funds rate significantly to try to curb inflation. The Prime interest rate follows the Fed Funds rate…so any time the Fed hikes the funds rate (or lowers it) the interest rate for HELOCs will often follow.

Since we are in an environment where the Fed is expected to continue to increase the Funds Rate, I’m encouraging clients to consider another option, a fixed rate second mortgage or “HELOAN”. With a home equity loan, the interest rate is fixed for a set period and is amortized over a set term (such as 30, 20, 15 or 5 years). Homeowners who opt for a fixed rate option will not have to worry about how much the Fed is going to adjust the funds rate at their next meeting.

Here are some of the features for second mortgages, including HELOANs and HELOCs from an earlier post.

One thing to keep in mind with a second mortgage is that should you decide you want to refinance your original first mortgage, the second mortgage (HELOC or HELOAN), will either need to be paid off with the refinance or subordinated. If it’s going to be paid off with the refi (and the HELOC/HELOAN was not obtained at the time you purchased your home), it may likely cause your refi to be treated as a “cash-out” refinance. If you want to keep the second mortgage, then the second mortgage lien holder/lender will need to agree to subordinate their lien position to the new first lien mortgage. The HELOC/HELOAN mortgage does not have to agree to do this… typically as long as the borrower’s credit is good and the loan to value isn’t too high (ie there’s enough home equity remaining), the second mortgage lien holder will agree – but again, there are no guarantees. There have been times when I’m helping a client with a refinance and the second lien holder rejects the subordination request OR they’re taking an extremely long time to process subordinations (this often happens during refi booms) and the borrower elects to include the second mortgage in the refinance and pay it off. The second mortgage (HELOC/HELOAN) is a lien on your home which will need to be dealt with.

PS: HELOANs and HELOCs are not just for remodeling your home. You can use your equity for just about anything, including paying off high interest credit cards (which will also see interest rates continue to climb if they’re attached to the Prime rate).

I’m happy to review your scenarios with you to see what works for your financial goals if your home is located in Washington state, where I’m licensed. 🙂

Click here for a no hassle scenario!

 

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