Your home equity loan or home equity line of credit could dash your dreams of reducing your monthly mortgage payment through a refinance. Blame a complicated mortgage-lending quirk known...
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Six Second Mortgage Pitfalls
Mistakes are inevitable. According to George Bernard Shaw, âSuccess doesnât consist in never making mistakes, but in never making the same one a second time.â But an educated consumer can succeed without making any.
Here are six common second mortgage pitfalls. If you know them in advance, you can avoid falling into their trap the first time around.
1. Choosing the wrong type. Second mortgages come in two varieties â the fixed-rate home equity loan, and the adjustable-rate home equity line of credit (HELOC). If you know the exact amount you need to borrow, a home equity loan is a good choice. However, if youâre looking to finance a project and not exactly sure how much it will cost, consider the flexible HELOC. You can apply for a credit line slightly higher than your needs. If there are any cost overruns, youâll be covered.
2. Drawing too much.Â Donât forget that youâre tapping your available home equity. If you withdraw too much money, it will affect your ability to get more credit, or refinance your mortgage down the road. Always stay conscious and in control of your credit limits so that they donât control you.
3. Forgetting about the life cap. The interest rate of a HELOC is tied to an index, so it can fluctuate daily. However, it also has a âlife cap,â which is the maximum amount that the interest rate can increase during the loanâs lifetime. If you can safely make the payment on your loan at the âlife capâ interest rate, you can rest assured that youâre not taking on more debt than you can handle.
4. Not reading the Good Faith Estimate. When you apply for your second mortgage, the lender must provide a âGood Faith Estimateâ within three days. Read it carefullyâ¦it gives a detailed list of all the closing fees involved, so there will be no surprises.
5. Using second mortgage to consolidate debt. It may sound like a good idea â taking out one large low-interest loan to pay off all your high-interest debt â but itâs only good in theory. The consequences can be severe if you donât handle the reasons that got you into debt in the first place. If you donât change your spending habits along with your loan type, you can find yourself in even greater debt down the road.
6. Limiting research. As with any mortgage product, itâs important to shop around for the best deal. Speak to local lenders, and do research on the Internet. Check with your personal banker and the brokerage house that holds your investment accounts. They may all offer second mortgage options that are competitive, especially if youâre an established customer. Refrain from jumping at the first great offer, since it may not be the best.
Itâs inevitable that youâll make mistakes. But if you learn about possible pitfalls before you make your choice, you can reserve them for areas in your life that arenât involved with mortgages.
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