Mortgage Rate News

One of the more intriguing ideas I have seen recently is a rather unique use for your home equity line of credit (HELOC). The HELOC is a second home mortgage that works a revolving line of credit. Basically, it’s like a big credit card, without the plastic. You can continue to borrow money from your home equity line of credit, as long as you are paying down the balance.

This post isn’t about how you can get out of debt with a HELOC, per se. Rather it’s about how you can use this second home mortgage to pay off your home loan faster. But be forewarned: this takes discipline. If you aren’t careful, you end up in debt and could get into troubled. So, you need to be sure that you can control your spending and use this system to your financial advantage.

The home equity line of credit to pay for everything

Here’s how it works. You take out the HELOC for your home. This second home mortgage can be used to replace your original home loan. Get it for 30 years, and try to get it at a fixed rate (difficult in the current climate). Next, put your entire paycheck (minus your savings and charitable contributions, of course) into “paying off” your home equity line of credit. This will cover your minimum payments and put more toward the principal. Buy everything you need and put your bills on credit cards (preferably with good rewards programs). Each month, use your home equity line of credit to pay off your credit cards in full.

As long as you are living within your means, what you put into the HELOC will more than cover your expenses. But you have to live on 70% to 75% of your income (because you should be putting at least 10% into savings, and giving something to charity if you wish) to make this process work.

Advantages to this HELOC system

If you do this, your second home mortgage will be paid off well before the 30 years, and you can keep using the equity in your home, even after the mortgage has been paid off. You will pay much less in mortgage interest because you have paid it off so quickly. But that’s not all. In many cases the mortgage interest you do pay on a home equity line of credit is tax deductible. And don’t forget all the free rewards you get for putting your expenses on the credit cards and paying them off each month.

There is an up front cost to this, though. In order to structure everything correctly, and to get your cash flow moving in the right direction, you will need to consult with an accountant. It can cost between $1,500 and $3,000 to set this up. But the savings down the road are worth it.

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mortgage interest rate, debt consolidation home equity, home equity line of credit

One of the questions that some are thinking about right now is the following: Will I be able to get a home mortgage?

The answer, of course, depends on your individual circumstances, as it always has. The difference now, with the mortgage market in turmoil, is whether your individual circumstances will be acceptable to mortgage lenders. What might have been good enough last year, or even six months ago, may not be good enough now.

Consider: For a subprime loan, a credit score as low as 620 used to be acceptable to some mortgage lenders. Now, most mortgage lenders want you to have at least a 650, and some won’t consider you for a home mortgage unless you have a 680.

Another difference is in an acceptable debt-to-income ratio. For a traditional loan, it has always been necessary for many lenders that you have a 28/36 ratio. This means that only 28% of your gross income goes to housing, and your total debt load (housing plus other debts) is 36%. In some cases, a subprime loan would let that total debt load go as high as 45%. That is certainly not going to be the case again any time soon. So it means that you have to have lower debt to get a home mortgage now.

Finally, another part of the home mortgage loan application process that is changing thanks to the present debacle is documentation. Many a subprime loan was made with questionable documentation as to income, debts and other deciding factors. Now, documentation is required for just about everything, and it has to be good documentation. Even people with good credit and low debt are finding that the documentation requirements can be quite onerous.

But perhaps all this tightening isn’t so bad. It is forcing people looking to get a home mortgage now to carefully evaluate how much home they can afford, as well as whether they should be buying a home at this juncture at all. This means that people who buys home have a better chance of keeping them, rather than losing them to foreclosure.

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second mortgage, mortgage lenders

When it comes to mortgage loans, it about more than just your income. Your credit score also matters. Here’s why:

Mortgage lenders look at people in terms of risk. Risk is all about how likely you are to default on a home mortgage loan. Your income plays a roll, as does the amount of debt you already have. And your credit score offers a numeric look at how risky you are. The higher your score, the less risk you pose to mortgage lenders. The lower your score, the more likely it appears you are to default on a loan, leading to foreclosure.

This thinking also applies to other types of mortgage loans, such as home equity loans or a second home mortgage. In fact, your credit score may need to be higher for these types of second mortgages because the debt load you already have from the home mortgage loan figures into how much risk you present.

Keep track of your credit score

Because your credit score is such an important part of whether or not you get a home mortgage loan, and because it influences the mortgage interest rate you get, it is important to keep tabs on it. If you have a lower credit score, you will pay more on your home mortgage loan, through a higher mortgage interest rate. Mortgage lenders charge you more to finance if you are a higher risk. This can amount to tens of thousands of dollars over the life of the home loan.

You can get a free credit report from each of the major bureaus every year, but it is worth noting that you credit score is not included in the report. When you get your credit report, you can pay between $5.95 and $7.95 to view your credit score as well. This is worth seeing, since it will help you distill the information from your credit report into a value that is more readable.

Tags: home equity loans, credit score, home mortgage loan, home equity second mortgage,
second home mortgage, get free credit report, mortgage lenders