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  • Smart Choices For Your Home Equity

    Author: Shelina Verjee Date: May 1, 2015

    Simply put, equity is the difference between the current market value of your home and what you currently owe on it. Obviously, the more equity you have the better.

    Homeowners choose to take equity out of their homes for many reasons, including: home renovations, debt repayment, down payment, real estate development, or to fund their childrenís education.  

    The good news is, if you do choose to pull equity out of your home, you have a few options available to you. The problem some people face is that they donít fully understand these options.  This is not surprising as the loan application process can often times be confusing and overwhelming.

    First, letís compare getting a second mortgage to refinancing with your current institution.

    Here are a few reasons you might choose refinancing over obtaining a second mortgage:

    You can keep your current mortgage loan.

    The closing costs are much lower.

    You can pay off your current mortgage and get a new one, perhaps lowering your interest rate.

    You only have one payment to make each month.

    There are more loan choices.

    It can be easier to get.

    A refinance is a good option if  you are happy with  your current mortgage arrangement and would prefer to keep it.  You will be able to  keep the low interest rate on that loan, while pulling equity out. Also, with a refinance, your loan term resets with the new loan. Another benefit is that refinancing is typically less expensive, as most institutions have a re-advanceable mortgage option. Choosing this route you donít need to consult a lawyer and the only fee payable, would be in the instance of an appraisal fee.

    Refinancing is also an attractive option if you are able to improve your interest rate and save money. Sometimes the savings are so dramatic, you are able to pull equity out and in addition, save money on your monthly mortgage bill.  If this is not the case, you are still able to keep the existing mortgage at the lower rate and remove equity at a new rate, yet still at a lower cost.  

    A few things to mention about second mortgages:

    Generally difficult to obtain as most banks like to have the first mortgage registered with them as well

    Rates are usually higher

    Higher fees due to the legal fees associated with registering a second mortgage

    They often have higher rates

    Two separate payments at two different institutions

    Fewer options regarding length of term

    They may not extend you a line of credit

    In most cases, whether you are applying for a first or second mortgage, approval is required. You will be required to provide your potential lender with the same proof of qualification requested for your initial mortgage. *Some existing borrowers will waive this if you are refinancing with them, you have auto payroll or your first mortgage has been less than 2 years.

    Second mortgages require proof of income and outstanding balance on first mortgage, along with proof that your bank has not restricted you from acquiring a second mortgage. In both cases the bank will re-establish  your credit history and any outstanding debt you may have. This is to ensure that you can service the additional funds. Remember: Approval is not guaranteed if your credit and debt servicing are not in line.

    In the case that these two options donít work and you are still in need of equity, you may want to consider a private second mortgage; however, it should be noted that these mortgages include:

    Much higher rates

    In some cases funds are loaned for short time periods

    Much higher fees

    Approval is quite easy as private lenders often charge higher rates and fees to hedge their risk.

    I welcome your comments and questions. Please feel free to call me at any time to discuss this further.

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Author : Shelina Verjee
Shelina Verjee brings more than fifteen years of outstanding service to the mortgage industry, along with hundreds of satisfied clients. Putting you in control of your mortgage process she provides her valued clientele with transparency, choice and unbiased mortgage advice.