utah2009 wrote:
Yes it is confusing, because we had one goal (lower the interest rate on our mortgage to save money) and now we have a new concern - coming up with money to cover legal bills - and home equity seems like a logical place to look.
We have $100,000 equity in a $300,000 home. When you say Home Equity Loan is that the same as a second mortgage? We have never taken out a HELOC - but that seems like it might be a good fit here. We spoke with our CU today, and will hear on Monday if we can finance our cars through them - they are paid in full, and that will cover the legal fees we have and anticipate will come.
Now it seems like a HELOC would be a good fit - it has the flexibility to allow us to cover unexpected or additional bills we still may have coming at us. However, we really want to refinance our darn mortgage. So, we have solved the immediate problem of covering the legal fees. Now we have two problems: 1)being flexible enough to cover any additional legal fees that come; and 2)refinancing for a better rate.
Would it make sense to HELOC now and refinance in six months? We can hold on that long, and our mortgage adjusts down to 8% (I know, I know) next month. If we refinance now, when could we potentially pull a HELOC? Thanks for the great info - it's a great help.
A home equity loan is a second mortgage.
With that amount of equity, you should be able to get a HELOC of around $40,000, maybe more depending on your local real estate market and what lenders in your area allow. Keep in mind what was mentioned earlier on this thread - if your HELOC's limit is below the $40k-$50k threshold, it will be scored as revolving debt and not installment debt. That would affect utilization, especially if you max out the HELOC, which would lower your score.
Trying to refinance after getting the HELOC could be a little more complicated. First, you'd have a new account on your credit report, which would lower your scores a bit and maybe make your interest rate less favorable. Second, when you open a HELOC, it will be subordinated to your first mortgage. When you refinance the first mortgage, the HELOC would have to be re-subordinated to the new loan. This might incur a fee, sometimes as much as $500.
If I were in your shoes, I would go for the refinance first and lock in a nice low fixed rate. This alone might free up some money each month - if your interest rate goes from 9% to 5.5%, your monthly payments could drop quite a bit, especially if you choose a 30 year loan. Alternatively, you could try to do a small cash-out refinance - for example, refinance your home with a new balance of $220,000 and pocket the $20,000 excess to cover you legal expenses. Just make sure you don't spend all that money at the track. I don't know how easy it is to do cash-out refinances these days. A third option would be to refinance your first loan and then open a HELOC shortly after that closes. I think you might be able to open the HELOC fairly soon after the refinance is completed.
Talk with a LO about your options.
Lastly, be careful about using your home equity for non-home related expenses.
