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Let's say you use an existing line of credit with a zero balance to pay off the first mortgatge early because the rates on the HELOC are significantly better (plus, you can pay on the HELOC more than once a month). Does cancelling the first mortgage have any legal effect on the second mortgage (as in accelerating payment on the HELOC or anything like that) ?
The term on a HELOC is generally a whole bunch less than 30 years, but if the existing first is nearing pay off then you correct -- a home equity loan may be a cheaper route than refinance.
The legal concept of "subordination of liens" is why second mortgages are allowed -- the equity needs to be sufficient to allow the borrower to still use the property as collateral. If the HELOC is used to satisfy the first mortgage it actually then becomes a even less risky loan, though legally it merely becomes the "senior lien".
Technically even people that own their homes free and clear can have a HELOC, in which case it is the "first" mortgage, and it ought to be even cheaper, but I have seen few firms actually advertise products that would reflect this...
The term on a HELOC is generally a whole bunch less than 30 years, but if the existing first is nearing pay off then you correct -- a home equity loan may be a cheaper route than refinance.
The legal concept of "subordination of liens" is why second mortgages are allowed -- the equity needs to be sufficient to allow the borrower to still use the property as collateral. If the HELOC is used to satisfy the first mortgage it actually then becomes a even less risky loan, though legally it merely becomes the "senior lien".
Technically even people that own their homes free and clear can have a HELOC, in which case it is the "first" mortgage, and it ought to be even cheaper, but I have seen few firms actually advertise products that would reflect this...
Makes sense?
I believe so. You're basically saying I get the mortgage cancelled and the HELOC (in form and in substance) is essentially the first mortgage.
I am cautious about taking this course of action because years ago when I had a different HELOC I wanted to refinance the first mortgage and the whole "refinance train" was nearly derailed by the HELOC holder refusing to subordinate - I never understood why the second mortgage holder was so obstinate.
The problem you ran into before is a little different. When you want to refinance if you choose to go with a NEW 30 year term the holder of any second mortgage is technically going to experience a material change in the risk that they are accepting. The degree to which this risk ought to concern them is questionable, as MOST people see their payment go down quite a bit with drops in rates and the added length is not going to increase the statistical likelihood of default. Even WORSE from a borrower's standpoint would be a decision to do a "cash out refi". That cash would have the potential of really decreasing the equity available should there be a default, and oddly it could be used to pay off the HELOC and potentially wipe out any profit that the lender had planned on...
When you use the proceeds for a HELOC to pay off the first you are DECREASING your total indebtedness and that is a very good thing for all parties (with the possible exception of the lender that had the first, if they stuck with a high rate and were making good profits from you..).
The funny thing is that if MORE LENDERS were a bit more on top of idiots using their homes as piggy banks we would NOT be in the mess we are right now, they ought to encourage MORE people to pay off high rate loans any way they can.
The funny thing is that if MORE LENDERS were a bit more on top of idiots using their homes as piggy banks we would NOT be in the mess we are right now, they ought to encourage MORE people to pay off high rate loans any way they can.
I can see where people get into trouble with HELOCs. We used it for specific purposes (home addition, paying off higher interest debt), and the entire time we've had one, the mortgage balance has never come close to equaling 100% of the FMV. Life's too short to have that extra stress (being underwater) placed on you.
We are in the process of paying off our first mortgage @ 6.5% /30 years with a Home Equity loan @ 4.99% /fixed for 20 years. No closing costs unless we prepay before 2 years. The entire process was so easy and only took a week. Can anyone see any problems down the road with this scenario?
Our monthly payments will be reduced by $300 per month. We have been in our home for 3 years.
No problem. The "mechanics" of the lenders Home Equity Loan might internally be different than normal 20 year term fixed mortgage, but you probably don't care about those sorts of things.
A fixed home equity loan is, to the consumer, no different than a fixed rate mortgage.
As far as the lender's accounting and such the mortgage is probably tracked differently for internal purposes, but should otherwise cause you not a moment's thought.
I have another question about heloc - I own a condo in Ohio (paid off) and want to move to Texas. Having problems selling for an acceptable price. If I take a Heloc out in Ohio, and rent my unit, can I use that money as a downpayment for a house in Texas? Would there be any negative consequences to my credit rating? Thanks all!
Negative consequences? Well the fact is that if you increase your borrowing and your income or assets do not increase THAT will have an effect on your FICO. The question of just how negative this is, and if there is a better alternative, depends a lot on where your credit score is at right now and what alternatives you have.
In my experience using a HELOC is pretty cheap money, and since it is secured with the equity in your property FICO generally seems to rate this as "unlikely to default" in contrast to unsecured CC debt and those store finance "no payments for XXX days" plans that have MUCH higher default ratios.
SO unless you have assets that could be converted to cash OR could borrow 'your own money' from a retirement plan, or have a relative or other private party that could lend you the money w/o credit checks I think it is about as smart a place to go to for borrowing.
I will caution that every HELOC must be settled upon the sale of the property that secures them, and some have provisions that technically prohibit their use for acquiring other property, but in my experience the odds of a lender invoking that clause, except when the suspect the borrower is a speculative flipper, are remote.
Thanks, Chet for the answer to my question about a line of credit. Sounds like you are very knowledgeable. If my income/assets are staying the same, do you know if it would help or hurt my credit position to close some credit cards with 0 balances, thus trying to keep the debt/income ratio the same by replacing the closed cards with the heloc?
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