How to Take Advantage of Your NJ Home’s Equity

Your home is likely the biggest investment you will ever make and it can be an extremely valuable asset. The best way to take advantage of the full value of your home is to utilize your home equity. Equity is the difference between what you owe on your mortgage and what your home is worth. Every time you make a payment on your home, your equity grows. Changes in the market value of your home can also increase your equity, as can certain home improvement projects. Here are three ways to tap into your NJ home’s equity.

1. Home Equity Line of Credit (HELOC)

A home equity line of credit is a great way to borrow money that will fund smaller home improvement projects. Like a credit card, a HELOC has a set limit on how much you can borrow and you will pay interest only on the exact amount you have borrowed. A convenience factor of a home equity line of credit is that you can withdraw money as you need it instead of all at once as a lump sum. The interest rate for most HELOCs is variable, but you can usually get a lower rate than you’d get using credit cards or personal loans. You will have a predetermined time frame to pay back the HELOC, at the end of which the balance must be paid off in full. Keep in mind that the more you borrow, the higher your monthly payment will be. Like credit cards, HELOCs are flexible. Also like credit cards, it can be easy to get in over your head with overspending and rising interest rates.

2. Home Equity Loan

These are less common than HELOCs. A loan will allow you to borrow a lump sum at one time and pay a fixed interest on the amount over a predetermined period of time. This is also a type of second mortgage. Home equity loans are great because they offer a fixed interest rate, meaning your monthly payments will not change and you will know ahead of time exactly how long you will be paying off the loan. However, homeowners should be careful when tapping into all of the equity in their home at once. If property values in the area decline, you could end up owing more on your home than it is worth. Loans are great for big home projects and one-time expenses.

3. Cash-Out Refinance

This option allows you to get a new mortgage for more than the unpaid principal balance on your old loan. You use the new loan to pay off your old loan and then have additional money left over. You can use this to renovate your home, pay off other debts, or even finance college. Since you are essentially replacing your mortgage, be sure to closely review the terms of your new loan. Double check the interest rate and fees of the new loan before you agree to the terms. You will also be responsible for closing costs, so make sure you can afford to pay between 2% and 5% of the mortgage.

Whenever you borrow against the equity of your home, your home is being put up as collateral. With that in mind, it can be a great way to borrow money as long as you carefully consider the best option for your unique situation!

Applying for and Refinancing a NJ Home Equity Loan

 

Do you have a brilliant idea for a new house project?

Have you been trying to figure out how to pay for the new roof you’ve needed for a few years?

If you’re nodding your head, a home equity loan (HEL) or a home equity line of credit (HELOC) may be the answer you’re looking for.

A home equity loan can provide you with access to a large amount of money with which you can complete a project with the added benefit of borrowing against the value of your home. A home equity loan is essentially a “second mortgage,” with your first mortgage being the one that you used to purchase your home.

Because this kind of loan is locked in by your house, a home equity loan can be relatively easy to obtain from a bank or lender. The beauty of a home equity loan is that it can provide funds for virtually anything you want, as long as your home is worth more than you owe (in your first mortgage) – and you’ve built up enough equity.

Home Equity Loan Options: Lump-Sum or Line of Credit

 

A home equity loan as a lump-sum is like any other loan; you attain a large amount of money up front and then pay it back with fixed monthly payments. Your interest rate will be set when you take out the loan. With each monthly payment, the total that you owe on the loan will decrease.

A home equity line of credit works much like a credit card. You’ll be approved for a specific amount of money and then only use what you need. Following approval, you can borrow money in small amounts, but at some point, you’ll need to make larger payments to finish paying off the loan.

Because a home equity loan can offer a fixed and steady repayment schedule, it can be a valuable way to decrease debt or pay for large expenses. If you’re considering completing a home improvement project, a home equity loan could be beneficial, especially since it’s a one-time remodeling project that involves directly investing money back into your house.

Other valid uses for a home equity loan:

• Paying for a college education (for you or your child)
• Making a vehicle purchase
• Eliminating credit card debt
• Investing in the stock market or real estate

You can also use a home equity loan for any other one-time investment that has value. Additionally, you may want to consider refinancing a home equity loan. If you are looking to decrease your monthly payment or want to lock in a lower interest rate, refinancing would be helpful. In addition, if you want to change from an adjustable rate to a fixed rate or vice versa, you should consider refinancing. While completing the project (or paying for school, etc), you may discover that you need a bit more money than expected, and refinancing could allow you to obtain supplemental funds or potentially extend or shorten your repayment period.

If interest rates have lowered from when you first purchased a home equity loan or if you’ve dramatically improved your credit score, always be sure to check into refinancing. As previously mentioned, if you switch from an adjustable rate to a fixed rate while interest rates are low, you can guarantee that the interest rate will stay that low throughout the rest of the life of your home equity loan.

If you’re considering taking out a home equity loan or refinancing one that you currently have, visit your credit counseling attorney who has your best interests at heart. Here at Veitengruber Law, we can also connect you with trusted lenders with whom we have cultivated valuable professional relationships. From there, you’ll meet with a lending specialist who has experience with refinancing home equity loans.  Refinancing a home equity loan can save you money, provide access to money, and help you reach your financial goals!

Stripping a Second Mortgage in a Chapter 13 Bankruptcy

Many people have taken out a second mortgage on their home. These second mortgages are usually referred to as home equity loans, because they are based on the amount of equity you have in your home. Your original mortgage loan’s value vs what your home is worth, along with your credit score determines how much money you can borrow through a home equity loan.

Typically, these loans are paid to homeowners in one lump sum so they can do home renovations or repairs. Some people use home equity loans to pay off a large debt with a high interest rate or to buy a vacation home. A home equity loan can seem extremely advantageous if you’re in need of some fast money, however the danger is that if you fail to repay the loan, you could lose your house.

Getting in over your head with your mortgage has been a popular theme in the past decade, so if you’re finding that you can’t make both your first and second mortgage payments, you’re not alone. Luckily, you do have some options.

If you could eliminate your second mortgage, would that make your monthly living expenses doable? Wishing you never took out that home equity loan? Filing for a NJ chapter 13 bankruptcy might be right for you.

A process known as ‘lien stripping’ can essentially erase that second mortgage, but this process is only available to debtors who file for chapter 13 bankruptcy. Additionally, in order to qualify for a lien stripping, your first mortgage balance must be higher than the current value of your home.

For example, if your first mortgage balance is $300,000, but your home is currently worth $275,000, you have zero equity in the property. In fact, you’re said to be ‘upside-down’ or ‘under water’ in regards to your first mortgage.

A $25,000 second mortgage would qualify to be stripped via chapter 13 bankruptcy in New Jersey. Upon application for a chapter 13 bankruptcy, your debts will be reorganized so that you can afford your monthly payments on all of your secured debt. In a chapter 13 bankruptcy, a second mortgage is referred to as a junior lien, and will be lumped in with all of your unsecured debts.

Throughout your chapter 13 repayment plan, you only have to pay a percentage of the total lump sum of all of your unsecured debts because they are considered “non-priority” debts. Upon successful completion of your bankruptcy payment plan, you will be granted a discharge. A chapter 13 discharge will put the lien strip into motion, and you will no longer be responsible for any remaining balance on your home equity loan or second mortgage.

The same is true for homeowners who also have a third mortgage on their home. If you want to stay in your home and would be able to afford your mortgage plus monthly living expenses if only you could “get rid of” your second or third mortgage(s), ask George about filing for a NJ chapter 13 today. You only have debt to lose!

 

Second Mortgages After Foreclosure: Who Pays?

What is a second mortgage?

Oftentimes, when applying for a home loan, first time home buyers don’t have enough money to make a substantial down payment. Typically, lenders don’t like to grant loans for more than 80% of the price of a home. Lending so much money to a borrower is risky, so banks who do so will require that the buyers purchase private mortgage insurance (PMI). Mortgage insurance is expensive, so borrowers try to avoid it by applying for two separate mortgage loans. The first loan granted is usually for a maximum of 80% of the purchase price, while the second mortgage covers the remaining cost of the home – typically around 20%.

Who can get a second mortgage?

In order to be approved for a second mortgage (also referred to as an 80/20 loan), you must have a very good credit rating. Because you won’t be making any down payment, you are a higher risk to your lenders. A high credit score (above 700) puts lenders at ease, knowing that you have a solid credit history.

What happens to a second mortgage after foreclosure?

Even well-qualified buyers can experience foreclosure. As they say, “Life happens,” and a variety of factors may cause you to become unable to continue making your monthly mortgage payments even if you had great credit when you bought your home. For example, you may have experienced:

• Divorce
• Chronic illness
• Accident or injury that permanently reduced your earning potential
• Job loss
• Unforeseen expenses (death or disability of a close relative, job transfer, etc)

Upon foreclosure of your home, your primary mortgage lender (80%) will sell your home at Sheriff’s Sale/Foreclosure Sale in order to recoup at least some of the money you borrowed but were unable to repay. Any sale proceeds that exceed what you owed your primary lender will be used to pay back your second mortgage lender.

Home sold at foreclosure sale almost always sell for less than they are worth. This means that second mortgage lenders often don’t see any proceeds from foreclosure sales. The second lender is left holding the (empty) bag, as the saying goes.

Will I have to repay the second mortgage if the foreclosure sale price is below market value?

Naturally, this is a pressing question for homeowners who’ve lost their homes to foreclosure. No one decides to go through foreclosure because they have plenty of money floating around. If you’ve lost a home to foreclosure, you’re understandably concerned about the potential of a deficiency judgment.

A deficiency judgment is a legal action that a lender can take against you for the amount of money they lost when your home was sold at Sheriff’s Sale. Many lenders will write off the loss due to the cost and hassle of mounting a legal action. However, some lenders do indeed pursue a lawsuit against defaulted borrowers whose homes were sold at foreclosure for less than the amount still owed.

How can I repay my second mortgage? I’m already in financial distress!

If your second mortgage lender has threatened you with legal action unless you pay up, you need to be proactive by retaining counsel. You can file for bankruptcy, which will automatically prohibit ALL of your creditors from attempting to collect money from you. Your NJ bankruptcy attorney can also take other action to settle your second mortgage debt if you wish to avoid chapter 7 bankruptcy.

Image credit: Chris Potter

Am I Risking Foreclosure for Non-Payment of a Home Equity Loan?

As we’ve talked a lot about here on our law blog, failure to make your home mortgage payments on time can quickly lead to your lender filing a foreclosure case against you. Lenders file foreclosure on non-paying debtors in order to repossess the home that was purchased with the borrowed money. After they officially foreclose and evict you for non-payment, your lender will put the property up for a foreclosure sale – also known as a Sheriff’s Sale. This allows the lender to recoup at least some of the money that you owe.

Now let’s discuss the concept of a second mortgage (sometimes called a home equity loan). Most second mortgages are taken out by homeowners in order to pay for home repairs or improvements. Some second mortgages are taken out to buy a second home. Second mortgages can also be used to repay a significant debt. It’s never a good idea to take out a home equity loan for something impractical like an extravagant vacation, but it has been done.

Second mortgages, a/k/a home equity loans, are attractive to homeowners because of their relatively low interest rates. Since you’ll be using your home as collateral for the loan, you can usually borrow a significant amount of money this way without having any limits or rules regarding how you use the funds. Also, any interest you pay on this type of loan is often tax deductible.*

Can I lose my home to foreclosure if I default on my second mortgage?

If you’ve had a significant life event that has had an impact on your finances, such as job loss, divorce, injury, disability, etc – it can be tempting to stop making the payments on some of your debts.

Although it may seem like an acceptable option when you’re strapped for cash, failure to make your monthly second mortgage payments can have catastrophic results. Unfortunately, many people do not know what can happen if they stop paying their home equity loan.

Even if you only plan to miss several payments so that you can “catch up” on some of your other financial obligations, your second mortgage lender has every right to begin foreclosure proceedings. Whether they will initiate a foreclosure depends on how much (if any) equity exists in your home.

What is “equity”?

To have “equity” in your home simply means that your home is currently worth more than you still owe on the original (first) mortgage.

If your home has at least some equity when you start missing payments on your home equity loan (second mortgage), your second mortgage lender is likely to foreclose on the property, hoping to salvage at least a portion of the amount you still owe.

Supposing your home has no equity, the second mortgage lender is unlikely to proceed with a foreclosure because they wouldn’t receive any money recovered through the Sheriff’s Sale. In this situation, the original mortgage lender would almost always file for foreclosure and they would be entitled to any funds recovered.

If your home is underwater when you stop making payments on your home equity loan, your second mortgage lender still has a right to money they are owed. Often in these situations, second mortgage lenders will sue delinquent debtors for the amount still owed on the home equity loan. Your wages may be garnished in order for the lender to recover their losses.

 

*Always check with your tax advisor.
Image credit: A.Eelectrik

 

Reverse Mortgage vs Home Equity Line of Credit

 

As we have previously talked about on our blog, there are many preconceptions when it comes to reverse mortgages. The basics: if you are age 62 or older and own a home with little to no mortgage payment, you can apply for a ‘reverse mortgage loan.’ You can present the equity in your home to a lender or bank as collateral for them to lend you money – either as a line of credit that you can use as needed, a one-time lump sum, or monthly payments. You can read more about the details of reverse mortgages here.

If a reverse mortgage sounds too good to be true, it’s for good reason. Even the most legitimate reverse mortgage loans come with high interest rates and exorbitant loan fees. Due to the 2008-2009 financial crisis that some financiers have referred to as “worse than the Great Depression,” many seniors have found themselves struggling financially in their golden years. Unfortunately, unscrupulous brokers have preyed upon some of these vulnerable retirees in order to profit from their financial strife.

If you are at least 62 years of age and have found your retirement income lacking, it’s important that you know how to avoid potential scams that could leave you in an even worse financial position. The following situations should send up a red flag:

• It’s free money! If you receive an advertisement for a reverse mortgage that claims you will qualify for free money, throw the ad in the trash bin recycling container post haste. Reverse mortgages are definitely not free, and any lender who attempts to trick you by omitting important facts about fees and interest is not a lender you should trust.
• No down payment. Not only are there down payments with reverse mortgages, but they can be quite hefty – sometimes tens of thousands of dollars!
• Risk free. Some brokers misrepresent the risk involved in a reverse mortgage, which may lead you to believe that you can never lose your home, no matter what. The reality is that a reverse mortgage will become due if you don’t live in the home for 12 consecutive months, or in the event that you fail to pay property taxes or homeowner’s insurance. You must also keep the home and property in good condition. If you fail to meet the requirements of a reverse mortgage agreement, your home will be foreclosed upon, and you will be evicted.
• Confusing language. If you don’t understand any or all of the information presented to you, do not sign anything. Reverse mortgage loans are notorious for being complicated and using tricky language. It is always in your best interest to seek legal counsel who can review the loan paperwork and translate anything that confuses you.

Because it can be easy to make a reverse mortgage sound like the best thing since sliced bread (and who doesn’t love bread?), many retirees don’t know that they have other options. One such alternative is a HELOC, or Home Equity Line of Credit.

While still using your home’s equity in order to boost your retirement income, HELOCs offer much lower interest rates. There is also no age requirement to apply for a HELOC, and there are no closing costs or loan origination fees. The equity in your home almost never gets depleted, which means your heirs will be able to keep your home without any problems.

Rather than requiring an age upwards of 62, in order to qualify for a Home Equity Line of Credit, you’ll have to have a very good to excellent credit score. You will also make monthly payments on your HELOC, and if you miss payments, you can lose your home to foreclosure.

If you need more information about how to increase your retirement income, seek legal counsel from a NJ attorney who specializes in credit counseling, elder law, or real estate.

 

Image credit: Images of Money