FAQ – Should I Get An Equity Loan?

I received an email from one of my clients that has been asked before. Since I am doing an FAQ on this site, I thought I would post it.

Should I refinance my house and get cash?

Hey there Wayne!

Curious question for you. I got a letter from some other mortgage company asking if I wanted to refinance with them at a lower interest rate (4.54% I believe) Anyway, they could re-finance with an additional $10,000 to the loan. $110,000 total. They would then give us the extra 10,000 in cash to be used however. Have you heard of this?

I wondered if you thought this to be a wise decision or do you think they get ya in some way down the road?

Hi Frank

Thank you for thinking of me to ask this question.

I don’t know the details this mortgage company is giving you, but, there are fees associated with a refinance, even if you don’t take any cash out but just want to lower the interest rate. Unless the interest rate is reduced by about 3%, the cost is usually not worth it because those funding fees are added to the principal balance and, obviously, you now owe more on the house.

As far as someone giving you cash, an equity loan, I would not recommend it. As you correctly state, the total mortgage amount would increase so you now owe more money for your house, plus you will again have additional fees included in the loan. The mortgage balance hasn’t gone down, it has gone up. This is where a lot of people have hurt themselves. If and when they sell, they no longer have equity in their house and may have to bring money to the table at closing. They usually don’t have it, so they can’t sell their house and they have to change their plans. I am sure you can imagine what happens when someone is forced to sell because they have to move out of state or have lost their job. This is what causes short sales and foreclosures. This scenario is where a lot of people are in trouble at this point in the real estate market, their house is not worth what they owe on it. A home equity loan can be a really big mistake and lots of people have made it.

Rather than doing an equity loan, I encourage people to do bi-weekly payments. If you think having a lower house payment would be great, how about if you got rid of it all together?? I have a program that anyone can join, it does not matter who has the mortgage. You just make 1/2 of your payment every two weeks. It is something you can do on your own, but it is also something that needs to be monitored, hence the third party, they will make sure the payments are applied properly. The problem that can arise when people make extra payments on their own is that the mortgage company has a potential to not apply the money to the balance of the loan but they apply it to the next payment. I have talked with you about this before so I encourage you to get with me so you can put it into practice.

To find out more about this 3rd party bi-weekly system you can visit End2Mortgage.com for some details and request a cd with a program that will show you what to expect from a bi-weekly system. Or, I have a copy of the program I could send to you if you let me know.

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