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If you aren’t happy with the current interest rate on your home’s mortgage or if you’re planning on renovating or remodeling your home, you should consider your financing options. Even if you’re looking for money to pay for your kids’ college tuition, to start your own business, or for another investment, you could get a low-interest loan that won’t put you in a lot of debt. So what are your options, and how do they compare with each other?
If you’re looking to gain access to some of the equity in your home or to use your home as collateral for a loan, you might be able to get a private mortgage, second mortgage, or home equity loan (HELOC). Or you may be able to refinance your mortgage so that you have a lower interest rate and better terms so you can use some of the income you were spending on monthly mortgage payments on something else (like your kids’ tuition).
Private Mortgages and Second Mortgages
If you already have a mortgage on your home, you can gain access to some of your home’s equity to pay for other expenses and investments through a second mortgage. Getting a second mortgage through the mortgage lender who holds your first mortgage or through a trust company is one way to do this. You need to understand, though, that this second mortgage will come with a higher interest rate than your first mortgage.
Second mortgages always come with a higher interest rate because they’re a higher risk for the lender. If something goes wrong, and you default on your mortgage payments, the first lender will always be paid out first, and there may not be anything left for the second lender. That’s why they get as much upfront in interest payments as they can.
But what about private mortgages? With a private mortgage lender, you may be able to get a lower interest rate on your additional mortgage, and they may not require you to have a better credit score, either. Here’s a breakdown of second mortgages through a trust company versus additional mortgages through a private lender.
Trust / First Mortgage Holder
In many cases, as you can see, you can get a better deal with a private mortgage lender than you could with a trust company or your first mortgage holder. But what about home equity loans and refinancing?
Home Equity Loans and Mortgage Refinancing
If you’re stuck in a mortgage with a high interest rate and the current market interest rates are favourable, you’ll likely be able to get a “blended” mortgage interest rate that splits the difference between your interest rate and the current market rate. And, if you’ve paid been paying on your home for a few years, you may have enough equity built up to qualify for a mortgage with better terms.
If you have equity in your home, though, you may want to consider a home equity loan or home equity line of credit (HELOC). This can give you immediate access to the funds you need instead of saving cash over a period of months or years.
HELOC or Home Equity Line Of Credit
Allows instant access to funds. Low interest rate
Requires a minimum of 20-25% home equity. New debt that needs to be paid off on a monthly basis.
No new debts. Potential debt consolidation. Better loan terms. Lower monthly payments and/or faster payoff
Will not give immediate access to funds.
Now you can see when it may make sense for you to choose one of these financing options over another. HELOCs and home equity loans give you better interest rates, but they are not always available. Refinancing will get you a better interest rate, but it’s not always the best option for a new investment or remodeling project. Second mortgages and private mortgages also have their advantages, especially for those who don’t have a lot of equity in their homes or who do not have the best credit.