One intuitive takeaway about the limited number of homes for sale is that the number of home equity owners in their homes has been growing over the years. Long-term ownership, along with rapidly rising prices, results in homeowners receiving between ten and hundreds of thousands of dollars of fortune accumulated in home equity. But you might want to keep this wealth safe.
Historical records from the Federal Reserve show that in the past, significant housing capital has led homeowners to take out second mortgages. This was especially true between 1988 and 1992 and again from 2000 to 2005. From 2005 to 2008, there was another slight increase in the number of secondary mortgage loans. However, since banks have demonstrated how easy it is to foreclose homes and to strip that capital, secondly, mortgages have dropped dramatically. Since 2009, mortgage loans have been steadily declining. The number of American homeowners who pay for both primary and secondary income. mortgage According to the Census Bureau, home equity loans have declined by about half since 2009.
If current homeowners aren’t selling a home so they can move into a larger, better home, should they use existing capital to fund renovations, extensions, and other financial reasons? This question has options as well as pros and cons.
Should I take a second mortgage?
There are two main types of second mortgages. One is a one-time home equity loan that you already own in your home. Typically, the second mortgage is up to 80 percent of your home equity.
The second type of loan is a line of credit secured by home equity (HELOC). As described in the title, you can access the loan as needed by writing a check or using a credit card instead of taking it as a lump sum.
The main reason the second mortgage went down is because the interest tax deduction severely restricts the use of money. Interest is not tax deductible if the money is used to pay off student loans, to consolidate consumer loans, and interest tax is not deductible if used as a down payment on vacation homes or for any other use that is directly not connected The house is mortgaged.
“The Tax and Employment Cuts Act of 2017, passed on December 22, suspends from 2018 to 2026 the deduction of interest paid on real estate loans and lines of credit if they are not used to buy, build or substantially improve the home of the taxpayer providing the loan . “ – IRS, IR-2018-32, February 21, 2018
Apart from the tax deduction, there are other important considerations. The annual percentage rate (APR) is important. This is the full amount of interest you will pay for a one-year loan. The annual interest rate includes any fees you may require, as well as the interest rate. While personal loans usually have a higher interest rate, the annual interest rate for a second mortgage may be higher due to all the other fees. Getting a second mortgage is a lot like getting your first mortgage. Tons of commissions and costs such as appraisal are included in the cost of obtaining a loan. You can usually include all commissions on the loan. However, this increases the amount of the loan, which also increases the amount of interest you pay each month. Take a close look at the actual value of money before assuming that a slightly lower interest rate on a second mortgage saves you money compared to an individual loan.
And then there is that foreclosure problem. This second mortgage is secured by equity in your home. If, for any reason, you delay payments, the bank may revoke your foreclosure rights for your home. On the other hand, most loans to individuals are unsecured (the reason for the higher interest rate). If you delay payments on most personal loans, your credit score will suffer, but no one will take your home away from you. And here’s the interesting thing, your net worth is still working in your favor for your personal loan. Your capital is probably your biggest asset. When this value is used to calculate your total assets and net worth, you are likely to get a lower interest rate on your personal loan.
Choosing between a second mortgage or a personal loan is more difficult, but these are important considerations for most people.
Homeowners don’t even use a second mortgage to renovate their home
The transition from a second mortgage to lending to individuals is obvious. According to a TD Bank survey, 9 out of 10 people (90%) use personal funds to finance home renovations. This is in line with data from the Federal Reserve, which shows a continuing decline in the number of borrowed loans secured by real estate.
A TD Bank poll found that almost all home owners planning home renovations find sources of money other than a second mortgage. People planning to remodel the kitchen, add another bathroom, or simply redecorate the landscape say the money will come from:
- 98.51% will use personal savings.
- 6.32% will take a personal loan.
- 1.05% will use payment bonuses and commissions.
- 1.05% will be borrowed from other sources such as family and friends.
- 0.0% will be financed by a loan secured by equity capital.
You will not be able to write off interest on these other credit sources. But on the other hand, your home is not at risk of foreclosure. The personal loan approval process is also much faster and requires less of your time and energy.
Of course, you have thoughts and experiences about second mortgages or personal loans. Please share by leaving a comment.
In addition, our weekly Ask Brian column welcomes questions from readers of all levels with knowledge of residential real estate. Please send your questions, inquiries or article ideas to firstname.lastname@example.org…
Author biography: Brian Kline was investment in real estate for over 35 years and has been writing about investing in real estate for over 12 years. He also has over 30 years of business experience, including 12 years as a manager at the Boeing Aircraft Company. Brian currently lives at Cushman Lake, Washington. A place to stay, close to the country and the Pacific Ocean.