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Mortgage Advice: Home Equity Loans Can Finance an Investment Properties and Second Homes

The idea of owning investment real estate seems to be gaining popularity as investors are getting tired of the unreliable stock market. Many investors feel confident with real estate as a place to secure their future, believing that overall it will outperform cash, fixed interest deposits and other investments, particularly for the medium to long term. Second homes account for a full 40% of all homes sold in America. According to a recent annual report by the National Association of Realtors (NAR), 27.7% of all homes purchased in 2005 were investment properties and 12.2% were vacation homes.

If you are considering either an investment in income producing real estate or a vacation home, it is generally better to cash out the equity in your home rather than to move cash from other investments which are doing well for you. If you’ve been paying on your mortgage for more than five years and the interest rate is below market rate, a home equity loan would probably work better for you than a mortgage refinance. And, a home equity line of credit (HELOC) could be your best answer for your second home purchase or other real estate investment.

There are generally no closing costs with HELOCs, as opposed to home equity installment loans (HEILs). HELOCs typically have a lower interest rate than credit cards or installment loans, and they offer a lot of flexibility in features and payback options, including:

Interest-only loan payment option (based on prime rate1 + a fixed margin).
Choose to pay only the minimum, or pay down your balance and have it available for you to use again and again for on-going maintenance of the property.
10, 15, or 25-year terms available with the option to extend the equity line of credit, rather than having to apply for a new loan, if there is still an account balance at the end of the loan term.
Borrow up to 100% of property value and pay interest on only the amount you use.
Lines of credit from 20,000 up to 250,000.

A property portfolio can provide healthy long-term capital gains, appreciating assets and cash flow from rent to add to your retirement income. In addition, the interest paid on a home equity line of credit is generally fully deductible (up to a maximum of 100,000), provided the loan does not exceed the fair market value less the outstanding mortgage.

1 Prime rate is the rate published each day in The Wall Street Journal (but not the Weekend Edition of The Wall Street Journal).

Home Equity Loan Comparison – Access Your Home’s Equity Through A Second Mortgage Or Equity Loan

You can access your home equity without the cost of refinancing with two financing options. A second mortgage will give you a lump sum check with a fixed or adjustable rate. A home equity line lets you tap into your equity when you want to. Both options allow you to write off interest on your taxes and avoid high financing costs.

Benefits Of A Second Mortgage

A second mortgage allows you to borrow up to 90% of your homes value. The lender, which doesnt have to be your primary mortgage lender, writes you one check. You can choose to pay off credit cards or make a major purchase.

Fees are none to minimal with a second mortgage. Rates are usually fixed and last 15 or more years. A 15 year loan lets you pay off the debt quicker, saving you cash on extended interest payments.

Benefits Of A Home Equity Line

A home equity line is like a secured credit card, only you are borrowing against your homes equity. You can choose to borrow a lump sum or only as needed. Most lenders issue checks and a credit card.

Rates are adjustable and are based on when you borrow the money. You can choose to never use the equity, but just know it is there in case of an emergency.

One option for new homebuyers is to put down a large down payment, securing low rates, and then apply for a home equity line. Its like a safety net, ensuring that you can still access your cash if needed.

Picking The Right Financing

Each type of home equity loan has its own advantages. A second mortgage offers secure fixed rates with small payments over a longer period. It makes sense for large projects, such as remodeling or paying off credit cards. A home equity line offers flexibility, better suited for smaller purchases.

With both types of programs, you still want to investigate lenders before applying. Be sure to look at financing companies other than your current mortgage lender. You want to find the lowest rates with the best terms by asking for quotes on both rates and fees. By investing a little bit of time, you will save yourself hundreds.