To get cash using your home equity as collateral, I only ever hear of getting a home equity loan or a home equity line of credit.
Question: why not refinance the primary mortgage so that it’s larger, and the lender hands you a check for the difference between the new mortgage and what you owed on the previous mortgage? Is there a regulation against this, or do the fees/expenses of a refinance make this a poor choice, even considering the higher interest rates typically associated with a home equity loan or HELOC?
Part of me thinks that it’s because HEL/HELOC companies target financially unsophisticated elderly homeowners who don’t realize that it would be preferable to refinance their primary mortgage.
Also, from what I understand, a primary mortgage must be with a bank/credit union whereas the market for secondary mortgages is open to HEL/HELOC companies. Hence why those companies would try to wrestle business away from primary mortgage holders.
I remortgaged my home twice over a 25 year period. Essentially I used the equity to guarantee a loan which had to be repaid (with interest) from income.
After you retire, you are not likely to satisfy the mortgage company’s criteria as a good risk. This is where the schemes that allow you to transfer part or all of the equity in return for immediate cash. Many retired people only have one real (in both senses) asset and these schemes allow them to become snowbirds or take cruises every year at the expense of their heirs. Of course, some of them are better than others.
If you have a parent considering a scheme, you should look at alternatives that you might be able to finance so that you will not lose the property when they die.
Actually, it’s about me and my wife. We’re considering buying real estate overseas, but we can’t obtain a mortgage for it because we’re not resident there. We can sell mutual funds to raise cash for the purchase, but we’d rather borrow money than sell off investments, and right now the only way I see to do that is by taking out a loan against the equity in our house through one of the methods I described in my OP; I’m just wondering what the cheapest/best way is to do it.
From the bank’s perspective, we’re low risk; we have good credit histories, we’re both gainfully employed, we’re only in our forties, and we have more than enough assets to pay back the loan even if we lose both of our jobs.
You can refi your primary mortgage. That was certainly popular in the lead-up to the Big Crash of 2008.
As you say, the refi fees are non-trivial whereas typically HELOCs are very easy & cheap to set up.
If interest rates have moved against you since you got the first, then it may be cheaper to keep the first as-is and pay a higher rate on a smaller HELOC than to refi the whole shebang at today’s higher rates. OTOH, if rates are level or down it may be better to refi the whole shebang. More than once I was able to refi a first to reduce the interest rate on the current principle (no equity withdrawal) with zero fees other than a couple hundred bucks at the title co to record the transaction with myself.
The other thing about a refi of the first is you’re extending your eventual pay-off date. And going back to those early payments which are 99% interest and 1% principle. The total life-of-loan cost can get real big if you refi that way a couple times.
Plus, much after age 35, you’re looking at your mortgage payoff date falling after your expected retirement date. Which means either paying off the balance as a balloon when you retire, or carrying the monthly payments into retirement. A HELOC has either a much shorter amortization period or may even be a revolving line with no definite payoff date.
Historically HELOCs would be willing to go to a higher loan to book value = percentage of total equity than firsts were. Which isn’t financially logical, but represents a triumph of HELOC lenders’ desire for more volume over less risk. I understand that’s changed a bit since 2008, but already the lessons painfully learned in '08 are being forgotten in the never ending crush to do more deals.
At the end of the day, the mortgage companies, both first and second, are more than willing to give you enough rope to hang yourself. That doesn’t mean your intended purchase of overseas property is a mistake. It does mean it’d be a mistake to think “Well, if they’ll loan me this much money it must mean I’m not over-extended, right?” Wrong.
Good luck whatever you do.
No, at least in the United States, this is not true. A lot of the big lenders for primary mortgages in the lead-up to the Great Recession, for example, were outfits like Countrywide Financial, which was never a bank or credit union, and even today Quicken Loans is one of the largest mortgage lenders in the U.S.
In fact, in many (all?) states the seller (a private individual) can hold the mortgage.
Our primary mortgage for about 8 years after we built our current home was a HELOC. It was more convenient as it simply converted the line of credit we had been using to pay as the house was built. Since the house was more than 25% paid off, it was OK as first mortgage and there was no requirement for a mortgage insurance on it.
The main reason not to use a HELOC as first mortgage is that typically, they only cover 75% of house value; so to start, you need more than 25% equity in your home. Most home buyers don’t meet that requirement. the other reason not to refinance, is whether you need the money in a large sum plunk-down cash or as a line of credit available as needed. When my wife was buying her car, the salesman was hauling out his book when I asked if he could beat 3.25% financing; he just put the book away. So we added $32,000 to the HELOC instead. We still have a few hundred thousand in borrowing limit, but no reason to take all that. (Depends how confident you are you can invest that money and beat the interest cost.) However, when we’ve been on vacation and it will take two or three months to pay off the credit cards, we can pay the full amount immediately out of the HELOC - no credit card offers that rate of interest. Now we changed banks, the new bank has 2.20% for the mortgage (first $150,000) and 3.5% for the HELOC.
Short answer - HELOC better if you don’t need all the money at once. Why pay interest you don’t need?
HELOC rates are usually higher than the corresponding mortgage rate would be, and/or are variable rate.
So if you anticipate rates going up, a HELOC might come back to bite you.
HELOCs also have limited draw-down periods, so consider that when making decisions. A typical period would be, say, 10 years (after which you must continue to pay but can’t access the money any more). Ours actually had a clause saying that after the 10 years, we could request to have that extended 5 years (but the credit union was under no obligation to comply). As it happened, they were perfectly happy to do so.
It may also be easy to have a HELOC’s limit increased without going through a whole lot of hassle. About 2 years back, we were attempting to purchase a condo for the in-laws. We were planning on taking out a mortgage, and that fell through at the last minute. I called our credit union, and they did a pull of our house’s value through various records and increased our limit by enough to cover the bulk of the condo purchase - we just had to sign and notarize one document.
It’s been about 10 years since we built our new house, and 2 years since we got out of a HELOC as primary mortgage(Now it’s $150K regular mortgage and $33K HELOC). Every so often the bank would try to tease us with guaranteed fixed low rates for 5 years - but over that whole time, the prime rate on the HELOC beat any fixed-rate mortgage we could have signed up for. The literature always warned us that a fixed rate was much better than the risk that interest rates could go up… and every year, the Bank of Canada suggests it will be at least a year before they start raising interest rates. It’s a gamble, and so far I’m winning - and paying down the house.