If you’ve gone through the purchase process it may seem like you’re providing every piece of your financial picture. While it is likely no exaggeration, lenders were in hot water around 2009 when the housing market crashed. Borrowers were getting approved for homes they couldn’t afford, but the interest-only loophole allowed this to happen. Able to move into a large home for low payments, what could go wrong? Since the mortgage balance was not moving as each payment was made, with home values slipping at the same time, most found themselves underwater, unable to refinance or sell their home, with many turning to foreclosure. As the market rebounded, lenders began to crackdown on qualifications, and for good reason, though opting on the side of caution, so current refinances do not get much of a break either.
Typical Mortgage Loan Options
While you may see commercials for reverse mortgages that cater to seniors, we will only compare the typical mortgage loan options that you may look to qualify for.
- A Traditional Mortgage: in first lien position with the lender, meaning that if your home were foreclosed upon, the bank would be able to recoup. These can be in the form of a purchase or refinance. Interest rates are historically low now and with payments spread out over thirty years, payments can remain affordable.
- Home Equity Loan: this is a separate loan, a 2nd mortgage, that borrows against the equity in your home. Since the lienholder is in second position, they will typically only allow you to borrow up to 80% of your home value so by the time the first lienholder is paid, they will still be able to recoup.
- Home Equity Line of Credit: while also a 2nd mortgage, a HELOC borrows from your equity as well, however instead of a fixed loan amount and interest rate, you can borrow as-needed, working like a credit card.
Which Option is Right for Me?
Certainly, each situation is different, there are a few questions you can ask yourself when deciding which loan option makes the most sense for you. Many of which are answered on the Home Equity Wiz FAQ page:
- How long are you looking to spread out the payments?
- What are the qualification requirements?
- How much documentation are you willing to provide?
- How does each one affect my credit score?
- Do you know exactly how much you need?
- How do you feel about a variable interest rate?
If you are looking to borrow a significant amount, whether it’s intended to payoff debt, fund a home renovation, or pay for a wedding, you’ll need to decide if going through a cash-out refinance process is worth it. Here you will need to provide plenty of documentation, not to mention incur closing costs to the lender and title company, but you’ll be able to spread the payments over longer terms. With a home equity line of credit, for example, if you are unsure of the exact amount you need to borrow and are open to paying back at the market interest rate, then this could be an option to have quick access to funds with a more streamlined approval process, though you still will need to meet credit & income qualifications.