Solano Real Estate Scene: Second mortgage may be best option
It appears mortgage rates are going to remain below 4% for a while, and as of today, 720-plus FICO score buyers and borrowers can get a fixed-rate first mortgage up to $625,000, the new Freddie and Fannie conforming loan limit, at 3% for a 30-year and 2.75% for a 15-year term.
Lots of homeowners took advantage of the historically low mortgage rates during the pandemic, and already have a fixed-rate mortgage between 2% to 2.75%.
In 2022 and 2023, when mortgage rates may hover around 4%, many homeowners will want to remodel their homes or put in a swimming pool and will be faced with a decision on how best to borrow $50,000 to $100,000. If their first mortgage balance is $350,000 and they have a 2.75% fixed rate, they will probably want to consider taking a second mortgage rather than refinance their 2.75% loan into a 3.75% loan just to get $50,000 to $100,000 in cash out.
As I always say, it’s all about the math.
Every single borrower has a different financial statement and different goals. One of the other reasons homeowners need cash out of their equity is to consolidate credit card and personal loan debts into one payment to lower their monthly outgo so they can afford to replace the roof or buy a minivan now that they have that third or fourth child.
Using your home as an ATM machine was what thousands of local folks did from 2004 to 2007, which in many cases turned out badly after the 2008 crash. However, using your home’s equity as collateral for a loan to remodel, repair and improve your home is usually better than running up personal loans and credit cards because interest rates on mortgages are lower than credit card and unsecured loan rates.
If a homeowner has $30,000 in credit card bills, $30,000 in automobile loans and very little in savings and now needs $30,000 to remodel or repair their home, doing a $90,000 second mortgage loan could be the perfect solution because the required monthly payment on the new 15-year fixed-rate $90,000 loan at 5% would be $711 per month in comparison to the $1,500 per month they were paying on their $60,000 worth of debt.
• Win No. 1: A lower rate on the new debt!
• Win No. 2: $789 lower monthly outgo!
• Win No. 3: $30,000 in cash out to stop the roof leaks or remodel the bathrooms and reduce the marital arguments and stress over money and a deteriorating house.
The key to these three wins is making darn sure they pay off over the long run and take advantage of the $789 monthly savings.
One idea, if the homeowner was already paying the $1,500 on time every month, is to continue to pay the $1,500 per month toward the new second mortgage and pay the loan off in less than six years and stop running up debt.
Another idea is to pay the $711 per month and invest the $789 every month with a great local financial adviser to establish cash reserves and maximize IRA and 401(k) contributions.
What happens too often is the $789 monthly savings creates a false sense of security and wealth, and the homeowner buys a boat or a new BMW at $800 per month and the three wins are wasted.
