Second Mortgage Options – The options listed below can be a good tool for your clients if they have equity in their home and do not want to refinance their current first mortgage. In some cases, they may be very happy with their current finance rate and will not want to adjust to current market rates, or they simply may not want to deal with the costs or intensity of a first mortgage refinance. Typically, a new second mortgage will be less expensive and close faster. The interest on these options may be tax deductible, but as always, have your client check with their tax adviser.
1. Home Equity Line of Credit (HELOC) – Rory Hamilton, mortgage loan officer at First National Bank, says “a HELOC is a variable rate loan with a draw period and repayment period. If your client has equity in their home, this type of loan can fund a larger project in a relatively short time. Most HELOCs close faster than a new first mortgage, many in less than 2 weeks. During the draw period, a client may take up to their credit limit, repay a portion and draw on it again. The loan acts much the same as a credit card, hence the term “line of credit." Once the draw period is over, typically five to 10 years, the loan will switch to the repayment period. During this period, the loan converts to a fixed term loan and the funds are no longer available for draw. Because this loan is a credit line, most HELOCs have a variable interest rate. This can be an effective option because the interest paid on a HELOC is currently tax deductible. Also, be aware that a new appraisal may be needed.”
2. Home Equity Loan – Like a HELOC, a home equity loan will be granted to utilize a portion of the equity your client may have in their primary residence. Home equity loans differ from HELOCs in that the rate and term is fixed for the entirety of the loan. There is also no draw functionality. If your client were to choose this loan, they will be granted a one-time, lump sum for use in conjunction with the project for which they hired you.
First Mortgage Options – As an alternate to a second mortgage, a new first mortgage may be a better option for your clients. They may choose this option if there is an opportunity to reduce their current mortgage interest rate to new lower rate. Typically the monthly payment on a second mortgage will be higher than the monthly cost of having access to the same amount of equity with a new first mortgage. Depending on the age of your clients, they could gain access to equity while waiving a monthly payment.
1. Cash Out Refinancing – This may be a viable approach for remodeling projects. If your client has a high interest rate, this may be good way to build in financing their project. Assuming your client has equity, this can be the simplest way to access that equity.
2. Mortgages with Built-In Renovation Financing – According to Bill Trees, national renovation program manager at Wells Fargo, “these loans help homeowners complete renovations with a loan amount that is based on an appraiser’s estimate of what the property value will be with completed improvements. This is also an option for home buyers who purchase properties that need repair. Whether a home purchase or a refinance, this option finances the renovations and mortgage in one loan.”
3. Home Equity Conversion Mortgage (HECM) Loan – David Matejka, vice president of 1st Mortgages, says these loans are “commonly called a reverse mortgage. For clients aged 62 or older, this is often a good option. This loan can grant access to a lump sum for renovation and repair. Based on the equity, it may also allow for monthly cash flow. One big advantage for homeowners who qualify for this loan is that they will not have a monthly mortgage payment. They may be accountable for paying taxes, insurance, and HOA dues monthly, but not a mortgage payment. Your client must have a minimum of 48% equity in their home to qualify for a reverse mortgage. The amount borrowed is based on how much is still owed on the current mortgage. Relieving them from the monthly obligation of a new loan payment, a reverse mortgage may offer the cash necessary to help finance a home modification. But be aware that many financial institutions do not offer reverse mortgages.”
This is the third article in a part four-part series, published every Tuesday in May, where the co-founders of the Living in Place Institute detail different financing options contractors should be aware of when working with a living in place client. Read more coverage on Financing Options for the Future: Non-Borrowing and Non-Mortgage Borrowing.
