Want to purchase a second home, first property is paid for. Having trouble getting second loan because amount is only $35,000. Should I finance with home equity?
No one wants to deal with that small amount.
Answers | 3
Unless you can find a local bank in the community where the property is located and will hold the loan servicing 'in house,' then your options are limited.
Financing the property through an advance on your home equity line of credit on your primary residence will likely be the best, fastest and lowest immediate cost option for you. The HELOC is likely to be the first choice since getting a 'cash out refinance' on your primary residence for that loan amount will run into the same issues.
In any event, you'll be able to purchase the property without any 'mortgage contingencies' which will help speed along the process and make you a 'better' buyer in the eyes of any Realtors in case there were competing offers on the property in question.
If you already have an existing line of credit on your primary residence, you will be able to simply write the check.
If you have to get a line set up, it may take a little longer - up to four weeks depending on the bank. Some may need an appraisal on your property. They will need to check the title history to make sure all liens have been paid and recorded.
The downside of any line of credit is that it is a variable rate loan subject to change. Usually, HELOCs are based on the Prime rate plus some amount.
Although there is no significant inflation in the system, there is the possible threat that there could be. And inflation is what drives interest rates - like Prime - higher. So you'd have to be prepared for that prospect when budgeting for the loan repayment.
Another thing to keep in mind is that most HELOCs only require 'interest only' payments for the first ten years. This is great for keeping your cash outflow low. But the downside is that after this initial period, your payment will be 'fully amortizing' for principal and interest for the next ten or 20 years. And the shorter payment period may mean higher required payments which could be an important factor for your cash flow.
If you don't want to risk having a variable rate, then ask for a Home Equity Loan - a fixed rate on a fixed amount drawn at closing.
Whether you use first mortgage on the subject property (if you're lucky to find a lender) or use a HELOC or loan, you;ll likely qualify to have the loan interest deducted on your taxes - if you itemize your deductions on Form 1040 using a Schedule A.
HELOC rates are still low and the up front costs are minor. The rate is tied to the fed funds rate (fed fund rate sets prime rate). Even if the fed funds rate goes up three points (where it usually sits), the impact on your payment (aka, interest rate risk) is negligible.
As an example, a $35K mortgage on a 15 year fixed (assuming today's rates and round up a little) is about $245/mo for principal and interest. A 30 year would be about $175. On a HELOC at 4.5% (again, more than most HELOC's I see, assuming good credit) the interest is about $131/mo. If the rate spiked three points the payment pushes to about $220/mo. Of course, you have to consider how you'll address the principal eventually.