2nd mortgage vs. home equity loan

[Iwritecode]

OK, I tried looking this up myself but I got confused. I know there are people here that can explain it more clearly.

 

I think I understand home equity loans considering we just got one not too long ago. Just throwing some numbers out, correct me if this is wrong:

 

Your home is worth 100,000 and you have 80,000 left to pay on it. You get a loan for 90,000 and have 10,000 to spend on whatever. Then you just make the payments like a normal mortgage.

 

I don't understand how a second mortgage works or how it differs exactly. Someone care to explain it to me in terms I can understand?

[Texsox]

OK, I tried looking this up myself but I got confused. I know there are people here that can explain it more clearly.

 

I think I understand home equity loans considering we just got one not too long ago. Just throwing some numbers out, correct me if this is wrong:

 

Your home is worth 100,000 and you have 80,000 left to pay on it. You get a loan for 90,000 and have 10,000 to spend on whatever. Then you just make the payments like a normal mortgage.

 

I don't understand how a second mortgage works or how it differs exactly. Someone care to explain it to me in terms I can understand?

 

The terms get tossed around and misused so much. There are two ways to go. One is to basically sell your house to yourself and pocket the profit and pay your new mortgage. (What you described) The second is to create a home equity line of credit which allows you to borrow against the equity in your house. Either way you could end up losing your house if you can't make the payments.

 

Linked

[Iwritecode]

From what I'm reading, a second mortgage is literally another loan against a house. Does that mean two different payments as well?

[Chisoxfn]

From what I'm reading, a second mortgage is literally another loan against a house. Does that mean two different payments as well?

Ya. Typically what people do is a cash out REFI where they basically get a new loan on the home. Say when you purchased a home in 2000 and had a 300K loan. Now the home is worth 600K. You basically take out a new loan and pay off the remaining loan. There are limits but in the end lets say you refi with 300K remaining and take out a new 400K loan which means you have 100K in your pocket right than and there and one payment.

 

Now thats say you own a home and instead of getting a new loan, you know your house is worth 500K and you only owe 200K which means you have 300K worth of equity. What you do is take out a equity line of credit for say 100K and now in essence you have 300K in loans but you don't get this 100K you essentially have a line and can borrow it when you want. You may just want the 100K line set up for a rainy day (and in that case you don't have any interest charges since at this point you have not borrowed against it).

 

It is almost like the difference between a loan and a line of credit. And 2nd mortgages are typically done when you initially buy a house. You take a 2nd because often times by going with a 2nd you can avoid certain fees that you would have to pay if you took like a 100% loan all on the first.

[Iwritecode]

Ya. Typically what people do is a cash out REFI where they basically get a new loan on the home. Say when you purchased a home in 2000 and had a 300K loan. Now the home is worth 600K. You basically take out a new loan and pay off the remaining loan. There are limits but in the end lets say you refi with 300K remaining and take out a new 400K loan which means you have 100K in your pocket right than and there and one payment.

 

Now thats say you own a home and instead of getting a new loan, you know your house is worth 500K and you only owe 200K which means you have 300K worth of equity. What you do is take out a equity line of credit for say 100K and now in essence you have 300K in loans but you don't get this 100K you essentially have a line and can borrow it when you want. You may just want the 100K line set up for a rainy day (and in that case you don't have any interest charges since at this point you have not borrowed against it).

 

It is almost like the difference between a loan and a line of credit. And 2nd mortgages are typically done when you initially buy a house. You take a 2nd because often times by going with a 2nd you can avoid certain fees that you would have to pay if you took like a 100% loan all on the first.

 

OK, what if you don't have any equity (or very little)? Are there any options?

[Chisoxfn]

OK, what if you don't have any equity (or very little)? Are there any options?

Probably not. You could maybe go to a bank and try to get a line of credit or loan, but you won't get a home equity line or a 2nd if your house hasn't appreciated since you purchased it or if you don't have any equity (at least I can't see any reason why a bank would do that since they would not have any collateral).

[NorthSideSox72]

OK, what if you don't have any equity (or very little)? Are there any options?

If you have little or no equity, you should not even consider taking on any other debt unless you have other property or something to secure it with (Car vs car loan, etc.). If you get upside down in a mortgage or other secured debt instrument, that can be BIG trouble. In fact, anything above 90% LTV (loan to value) is high-risk.

[Chisoxfn]

If you have little or no equity, you should not even consider taking on any other debt unless you have other property or something to secure it with (Car vs car loan, etc.). If you get upside down in a mortgage or other secured debt instrument, that can be BIG trouble. In fact, anything above 90% LTV (loan to value) is high-risk.

Or if some disaster happens and you get nothing. Its just a scary situation because you are risking a lot (and many people are in this type of bind; especially people getting into interest only loans around this time period that don't have the money or resources to go through an ugly real estate market for a few years because if those people end up having to sell they will take a beating if they bought recently in Cali).

 

I mean I have no idea what the money is for, but if it is to raise money for some sort of luxury item (ie non necessity) I would flat out stay away from it because you could really find yourself in a hole after the fact. Now if it is for something very important (medicine or college or food or whatever it may be) than s*** screw it that is more important.

 

Just my 2 cents as an uptight accountant that is pretty stingy with most things (aside from pissing money away on sports and my nice tv set up).

[Iwritecode]

Or if some disaster happens and you get nothing. Its just a scary situation because you are risking a lot (and many people are in this type of bind; especially people getting into interest only loans around this time period that don't have the money or resources to go through an ugly real estate market for a few years because if those people end up having to sell they will take a beating if they bought recently in Cali).

 

I mean I have no idea what the money is for, but if it is to raise money for some sort of luxury item (ie non necessity) I would flat out stay away from it because you could really find yourself in a hole after the fact. Now if it is for something very important (medicine or college or food or whatever it may be) than s*** screw it that is more important.

 

Just my 2 cents as an uptight accountant that is pretty stingy with most things (aside from pissing money away on sports and my nice tv set up).

 

Well, the truth is that our house is getting too small and not in the greatest shape. In a perfect world, I could get a loan to make the repairs on the house, have the repairs up the value of the house enough so that I could sell it and make enough to pay off the mortgage and the loan and then basically start over with another bigger house.

 

The problem is that I'm not sure the value that would be added to the house would actually be greater than the cost of the repairs.

[NorthSideSox72]

Well, the truth is that our house is getting too small and not in the greatest shape. In a perfect world, I could get a loan to make the repairs on the house, have the repairs up the value of the house enough so that I could sell it and make enough to pay off the mortgage and the loan and then basically start over with another bigger house.

 

The problem is that I'm not sure the value that would be added to the house would actually be greater than the cost of the repairs.

That is a financial reach. Even if you are confident that the repairs would up the value enough, you are still taking away some or all that equity with debt, not to mention paying more interest, thus upping your cost of living. Plus the risk involved - what if the repairs cost more than anticipated, or you cannot finish them for some reason? Just be careful, and think twice or three times before going over 90%.

[Chisoxfn]

In the past (when i was working for my dad who does real estate) I went into a couple projects like that where we would pick up a house, make repairs and sell it for more. However, that was in Socal and in a different market setting.

 

We knew unless there was some sort of disaster that these houses were selling for a bunch more, plus since we are agents we were able to get 3% off the house when we bought it and typically we can find a client on our own to sell to (so we don't have to pay any selling comissions to an agent) which clears things up.

 

But in this case you obviously own the house so the only comissions you'd potentially have to pay would be related to when you sell the house. However, we had a contractors license that we could use to purchase materials cheap and from the years of doing business we also had contacts of people that do good work for a very affordable price (hence we are able to do things for less than what a normal home buyer would be able to, which again gives you a little more leeway).

 

The other key is we didn't have to do any structural repairs because honestly those are repairs 99% of home sellers are going to have to make prior to selling the house (even to people like us who were planning on flipping it). So basically put if these repairs are things such as new flooring/paint maybe just cleaning up and refinishing the cabinets than ya it could be worth while (again depending on the market where you live and if you see houses in this sort of shape going for quite a bit more than your home than put in that factor but don't forget stuff will cost money, take time, and obviously you'll have a selling comission to factor as well).

 

But if you have to repair piping and all that other junk than I don't think your going to make money doing that, you'll probably lose money and I'd imagine when the home buyer gets the house inspected they are going to ask you to make those repairs (regardless of the price they are paying, unless they are getting a total bargain of a price) because the normal buyer isn't going to want to deal with that.

 

Obviously you own the house which m

[Iwritecode]

In the past (when i was working for my dad who does real estate) I went into a couple projects like that where we would pick up a house, make repairs and sell it for more. However, that was in Socal and in a different market setting.

 

We knew unless there was some sort of disaster that these houses were selling for a bunch more, plus since we are agents we were able to get 3% off the house when we bought it and typically we can find a client on our own to sell to (so we don't have to pay any selling comissions to an agent) which clears things up.

 

But in this case you obviously own the house so the only comissions you'd potentially have to pay would be related to when you sell the house. However, we had a contractors license that we could use to purchase materials cheap and from the years of doing business we also had contacts of people that do good work for a very affordable price (hence we are able to do things for less than what a normal home buyer would be able to, which again gives you a little more leeway).

 

The other key is we didn't have to do any structural repairs because honestly those are repairs 99% of home sellers are going to have to make prior to selling the house (even to people like us who were planning on flipping it). So basically put if these repairs are things such as new flooring/paint maybe just cleaning up and refinishing the cabinets than ya it could be worth while (again depending on the market where you live and if you see houses in this sort of shape going for quite a bit more than your home than put in that factor but don't forget stuff will cost money, take time, and obviously you'll have a selling comission to factor as well).

 

But if you have to repair piping and all that other junk than I don't think your going to make money doing that, you'll probably lose money and I'd imagine when the home buyer gets the house inspected they are going to ask you to make those repairs (regardless of the price they are paying, unless they are getting a total bargain of a price) because the normal buyer isn't going to want to deal with that.

 

Obviously you own the house which m

 

If we could find somebody that would be willing to buy the house, fix it and sell it for his or her own profit, I'd be fine with that too. I just don't see that happening.

 

Mostly what needs to be done is stuff like new siding, carpeting, kitchen cabinets and flooring, and maybe some paint and landscaping.

 

We got into this mess to begin with because the guy who inspected the house before we bought it was totally incompetent (and from what we heard, fired shortly after) and we were too young and dumb to know better. To be totally honest, it might just be better to tear the whole thing down and start over. Where’s Extreme Makeover Home Edition when you need them?

 

It’s obvious that one of the prior owners did some work on the house themselves and did it very poorly. We have at least two walls in the house that are not at a 90 degree angle with the adjoining wall. It’s more like 95 or 96 degrees. There is one room that has a wall that is a good 5 or 6 inches longer than the opposite wall.

 

Anyway, it just an idea that I’ve tossed around but have never really gotten serious about. For now it looks like we’ll just continue to do what we’ve been doing since we bought it. Replace and fix things little by little every year. One year it was new windows. Then we re-did the bathroom. This year it’s a new central air unit. Maybe we’ll eventually get it all done. By that time the kids will be grown and gone and we won’t need a bigger house…

[Steff]

Flips aren't happening in Rockford Jas..

[Chisoxfn]

Flips aren't happening in Rockford Jas..

Well I'm not familiar with the area, but, I know it is a lot more common out here in SoCal where you have really high turnover in homes and far shorter sales windows (and I'm sure it happens a lot in the city where people pick up an old condo in a good area and try to clean it up and throw it back on the market).

 

I know in a lot of areas where there isn't as much demand (homes typically sit on the market a lot longer...for example where my family is from in Iowa) flipping is very uncommon because no matter what type of deal you'll get its hard not to get killed when you end up holding onto a house for an extended period of time (not only the sell time, but also the time you are holding onto the home while you are making the repairs). I mean lets be honest, you don't really buy a house in Iowa and figure its going to make a ton of money (appreciation is just very rare since land is easy to find and as opposed to paying a high price for an already built house its just as easy for someone to go, buy some land and build there own place (this really limits appreciation).

 

That said I'm always amazed at how old houses can go for so cheap because the option of rebuilding it (even if the land costs near nothing) is real expensive (since biulding costs have climbed over recent years).

 

On a sidenote is that the Rockford where the Rockford Peaches are from (A league of there own??)

[Iwritecode]

Flips aren't happening in Rockford Jas..

 

I know...

 

There's a reason we were voted as the city with the "most affordable housing". That's why I'd like to just do enough to make it sellable and get out of here. For what we are paying for this thing, I'm sure we can get something a bit bigger and in better shape.

 

On a sidenote is that the Rockford where the Rockford Peaches are from (A league of there own??)

 

Yes it is. As a matter of fact, my wife used to work with one of the original Peaches.

 

Sadly, the field they used to play on is no more. As far as I know, the didn't even film any of the movie here either. They might have had the field still been around.

Edited February 1, 2007 by Iwritecode