A Home Equity Loan, “Second,” or “Junior Lien,” is a second home loan secured by the equity in your house in addition to your first mortgage. It is not a re-finance, but allows you to keep your low-interest rate “First” in place. It creates a second claim on the property in case of default. As we move into a 2024 Recession, it is expected that the “appraised market value” of existing homes, especially older homes, may decline significantly as persistent high interest rates keep discouraging Buyers from buying, and encourages them to stay on the sidelines for longer. This situation may force you to borrow against your current appreciated equity to stay liquid, and to consider your increased debt as a “blended” fixed interest rate that is less than current high market rates. The loan amount available to you will be based on your CLTV (combined-loan-to-value), the difference between your home’s current appraised market value and your existing mortgage balance plus your second home equity loan.
Of course, re-positioning into a higher LTV has the downside of more debt. But the cost of capital is very high now, and the risk/reward calculation is very subjective for you to make depending on your personal financial situation. It can give you more financial cushion to navigate through the next few years until you have the opportunity to re-position your total housing obligations. This would occur if the interest rates go down, or if you sell and move.
Rates for HELOCS are typically higher than seconds, and often include risky Adjustable Rate terms. “Stand-Alone Seconds” can be a better choice because they typically provide a lower fixed interest rate and allow you to take advantage of your inflated equity value while it is still available.
Second mortgages can be used for home improvements, debt consolidation, educational expenses, medical bills, or any significant financial need. You may also use them for investment purposes, which is what many people did in the Great Recession. To have cash in the bank is a good strategy to prepare for buying distressed rental properties when they go underwater.
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Randal Collen MLO #2386273 & DRE #01452367