A bank may be lurking in your home’s value. Should you ask for loan?
Use Equity With Caution to Consolidate Debt and Loans
Equity belongs to the homeowner. But it’s not cash. To make it cash, you need a Mortgage Banker.
Are you curious about cash-out refinancing? Or a new equity loan to consolidate debt and existing loans? CALIFORNIA MORTGAGE ADVISORS, INC. is your Mortgage Banker. Our exceptional resume will quickly add expert guidance to the question:
Is it time to consolidate debt and loans?
Tapping equity to pay off debt by refinancing into a new first mortgage with cash out is one of many ways to consolidate you debts. Here are the main sources for consolidating debt using equity.
First Mortgage
- Lowest Rates available over other options.
- One loan equals one payment each month
- Many program options available giving you flexibility in monthly payments and terms.
Home Equity Loan
- Secured with a 2nd mortgage, home equity loans offer interest rates lower than personal bank loans
- Repayment is a fixed term usually up to 15 years
- The interest may be deductible
Home Equity Line of Credit or HELOC
- This is usually a variable interest rate loan that taps home equity, secured with a 2nd mortgage
- Pay it down and you can borrow again by simply writing a check
- The interest rate changes with the market and is typically higher than a mortgage but lower than a personal loan
- Often, HELOC’s offer interest-only repayment for a period of time. While this reduces the payment (to ease financial problems at a difficult time, for example), eventually the principal has to be paid back
Reverse Mortgage
- For seniors (age 62 and up), a reverse mortgage harvests the full residual equity of a home, putting substantial money into the homeowner’s pocket (a lump sum or periodic payments)
- There are no restrictions on how the money is used, but some uses are discouraged
- The homeowner retains title until the last owner departs the home
- Typically, the loan is repaid from sale proceeds, reducing or eliminating inheritance by heirs
- Please consult our REVERSE MORTGAGE page for comprehensive information.
An experienced partner like CALIFORNIA MORTGAGE ADVISORS, INC. is best equipped to help determine options and timing.
One outcome is that we may advise against consolidation. But if we conclude together that it’s sensible, our access to refinancing products will deliver the best options. We’re ready to put our expertise to work for you. Click here to get started at no cost or obligation.
To Know When it Makes Sense to Consolidate, Look at When it Doesn’t
We like to tell the story of Steven and homemaker wife Wendy. They owned a comfortable 3-bedroom home in Palo Alto. Steven worked 22 miles south. At the time, the tech boom-driven economy was expanding. The boom ultimately turned the region into world-famous Silicon Valley. Steven and Wendy’s home equity had been climbing fast. They wanted to refinance their 30 year mortgage to take out cash for six purposes:
- They planned to pay off two personal home improvement loans. The monthly payments were about half the mortgage payment
- College loans also stressed the budget. Pay them off
- Credit card use was a little out of control as the couple raised the family but made minimum monthly payments. A fresh start was appealing
- A promising tech startup opportunity was looking for “friends and family” investors
- As parents of adolescents, Steven and Wendy had not taken their dream European vacation; in fact, they’d not seriously vacationed in nearly a decade
- At 44 miles a day, the nine-year old commute car was racking up maintenance costs. Time for new wheels.
Which, if any of these reasons, warrants tapping into home equity? The answer lies in the top reasons to NOT use equity:
1. Consolidating doesn’t erase debt. It shifts it into a long-term mortgage. Even though the interest rate may be far less than the rates charged on credit cards, over time much more will be paid
2. Homeowners who consolidate for the wrong reasons might fall into the psychological trap of thinking that borrowing is the best route out of debt. Consolidating does not erase debt. Stretched-out repayment is expensive
3. Consolidation can lead to more debt. Immediately following consolidation, euphoria over the new lower monthly outlay of cash can lead to new credit purchases
4. Improperly used, consolidation through home equity keeps you in debt longer – much longer in many cases
5. When a house becomes the collateral, risk of aggressive debt collection increases if unemployment, health crisis or other income-reducing event threatens repayment
For Steven and Wendy, only the first bullet – paying off the home improvement loans – make sense for consolidation via a cash-out refinance of the mortgage. Why? Because home improvement directly impacts the collateral – the house – it’s an equity driver, thus it’s a good cause.
Will you boast to friends that your new car comes with a 30-year repayment schedule? Or the $25K you put into XYZ Tech was lost to bankruptcy and you still have years of payments? CALIFORNIA MORTGAGE ADVISORS, INC. is ready to help you consolidate the right way.
At California Mortgage Advisors Inc., we genuinely believe that we offer our clients the best mortgages in the industry. We have offered a variety of loans since 1993, which means our Mortgage Advisors have successfully matched tens of thousands of borrowers with loans tailored to meet their needs and unique financial situations. Our Mortgage Advisors are available at (800) 927-6560 to answer your questions or click here to apply online.
