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Moderator Emeritus
Posts: 4,470
Registered: ‎12-31-2008
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Refinance or HELOC or 2nd Mortgage?

Hoping for some advice:

 

We have an ARM that's at 9%.  It's 7 years old.  We are hoping to refinance. 

 

DH Scores 729 TU, 776 EQ; Avg age of acct. 6 yrs; utilization 9%; AvlCR 39,000

My Scores 730 TU, 706 EQ; Avg age of acct. 9 yrs; utilization 7%; AvlCR 4,000

 

We also find that we have some attorney bills coming our way.  We do not want to put them on our CC's and affect utilization when we're hoping to refinance.  However, the refinance seems like it will take 4-6 weeks and we will probably need to pay the attorney fees before then.  We have already pulled our savings to cover attorney retainers.  (Small savings, I know, but we're just recuperating from the last round of attorney fees - UGH!!!!!!!) 

 

Would a HELOC or 2nd mortgage make more sense than refinancing?  We're feeling stumped.......

Just puttin' syrup on something, don't make it pancakes.
Moderator Emeritus
Posts: 5,267
Registered: ‎03-18-2008
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Re: Refinance or HELOC or 2nd Mortgage?

I'm a little confused about your goals.  Are you trying to lower the interest rate on mortgage to save money, or are you trying to take money out of your home (i.e. tap into your home equity) to pay your legal bills?

 

If you have sufficient equity in your home now, then now is an excellent time to refinance into a fixed rate loan.  Current interest rates are among the lowest in decades; you could easily cut your interest rate by 3% or more.  Rates are not going to stay this low forever.

 

If you need to pull out money for bills, then either a home equity loan or HELOC would solve that problem.  You're probably going to need to have at least 20% equity in your home; I don't think there are any lenders left that are allowing second liens up to 100% of the home's value.  Fixed-rate home equity loans usually have much higher interest rates than HELOCs, probably in the 8-9% range, and have associated closing costs.  HELOC interest rates are tied to the prime rate, and are usually quoted as prime rate + a margin.  For example, my HELOC is prime + 1.24%, so right now the interest rate is 4.49%.  When the Fed starts raising interest rates again, the interest rate on HELOC rise as well.

Regular Contributor
Posts: 220
Registered: ‎05-11-2009
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Re: Refinance or HELOC or 2nd Mortgage?

Utah,

I recently learned that a HELOC affects utilization.  I was dinged on my scores for the full amount which has had a zero balance since 2002.  (It was required that we take a draw immediately.  We did, and paid it off in 2 days.)  I'm in the process of a refi and it's going away...... 

 

I'm sure one of the Mortgage guys can explain it better.  If you can refi, I think you'd be ahead.  You may be eligible for a streamline refi.  Check it out.

 

Good Luck with whatever you decide. 

D-R

Moderator Emeritus
Posts: 5,267
Registered: ‎03-18-2008
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Re: Refinance or HELOC or 2nd Mortgage?

HELOCs are a funny thing when it comes to utilization.  If the CL on a HELOC is above a certain threshold - somewhere around $40,000 to $50,000 - it is treated as an installment loan for scoring purposes.  Below that threshold it is treated as revolving debt.

 

I used a high CL HELOC to refinance a home equity loan last year.  It was maxed out when it was opened (nearly $100,000).  My utilization reported on my FICO credit reports did not reflect this maxed out line; it still reported utilization of around 3-5%, which is where my credit cards have always been.

Regular Contributor
Posts: 220
Registered: ‎05-11-2009
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Re: Refinance or HELOC or 2nd Mortgage?


Lel wrote:

HELOCs are a funny thing when it comes to utilization.  If the CL on a HELOC is above a certain threshold - somewhere around $40,000 to $50,000 - it is treated as an installment loan for scoring purposes.  Below that threshold it is treated as revolving debt.  (That's exactly what I found out!  I was going nuts trying to figure out why my CR's were dinging me for less than a $60.00 balance on thousands in unused CL's.  Per all 3 CRA's: "Revolving Balances Too High.")

 

I used a high CL HELOC to refinance a home equity loan last year.  It was maxed out when it was opened (nearly $100,000).  My utilization reported on my FICO credit reports did not reflect this maxed out line; it still reported utilization of around 3-5%, which is where my credit cards have always been.  (This sounds really interesting!)


 

 Too late smart...... and still trying for figure out how a zero balance can also be a debt..... <sigh>

D-R

Moderator Emeritus
Posts: 4,470
Registered: ‎12-31-2008
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Re: Refinance or HELOC or 2nd Mortgage?


Lel wrote:

I'm a little confused about your goals.  Are you trying to lower the interest rate on mortgage to save money, or are you trying to take money out of your home (i.e. tap into your home equity) to pay your legal bills?

 

If you have sufficient equity in your home now, then now is an excellent time to refinance into a fixed rate loan.  Current interest rates are among the lowest in decades; you could easily cut your interest rate by 3% or more.  Rates are not going to stay this low forever.

 

If you need to pull out money for bills, then either a home equity loan or HELOC would solve that problem.  You're probably going to need to have at least 20% equity in your home; I don't think there are any lenders left that are allowing second liens up to 100% of the home's value.  Fixed-rate home equity loans usually have much higher interest rates than HELOCs, probably in the 8-9% range, and have associated closing costs.  HELOC interest rates are tied to the prime rate, and are usually quoted as prime rate + a margin.  For example, my HELOC is prime + 1.24%, so right now the interest rate is 4.49%.  When the Fed starts raising interest rates again, the interest rate on HELOC rise as well.


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.

Just puttin' syrup on something, don't make it pancakes.
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Moderator Emeritus
Posts: 5,267
Registered: ‎03-18-2008
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Re: Refinance or HELOC or 2nd Mortgage?


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.  

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