This is a version of a blog I wrote last year, but with a twist. Last year, I focused on Home Equity Lines Of Credit (HELOCs) instead of just “Second Mortgages.”
This year, however, HELOCs are out of favor because they are tied to the Prime Rate (currently 8.5%) and the Prime Rate has risen over 5% over the last few years – which has alarmed many HELOC holders.
HELOCs are effectively “second mortgages” too, as they are liens behind a first mortgage. But, HELOCs are variable rate mortgages while fixed-rate second mortgages come with fixed interest rates, as the name implies.
Many borrowers are opting for fixed-rate seconds (also referred to as Home Equity Loans) instead of HELOCs now because they are afraid of the rate-variability that comes with HELOCs.
FENDING OFF LAWYERS
When I was in law school, I clerked for a firm that specialized in commercial litigation.
And – the first thing the attorneys did when considering litigation was to ensure the defendant had sufficient assets to go after – should they win a judgment.
And a primary asset they looked at was the defendant’s home; if there was too little equity (along with too few other assets), the attorneys would sometimes discourage litigation altogether. This is because successful litigation can be fruitless if the defendant has insufficient assets.
So – this is just one reason to get a home equity line of credit (HELOC) or a fixed-rate second mortgage; the extra encumbrance/lien can discourage litigation.
DISCLAIMER: We don’t even offer stand-alone equity lines, as we refer them all out, but we do offer fixed-rate seconds.
Here Are 5 Reasons To Get A Second Mortgage – Now!
- Access cash – without refinancing out of a low-rate first mortgage. If a borrower needs cash but her first mortgage is at 2.75%, it would not be prudent to do a cash-out refi – into a much higher rate – unless the first mortgage is small and the amount of cash needed is very large.
- Encumber property to fend off lawyers. See my story at the top of this blog.
- Banks often tighten HELOC guidelines during recessions. HELOCs and Second Mortgages are often much harder to obtain during recessions when borrowers need them the most, as nervous banks will often tighten guidelines when recessions hit (something we are seeing now in fact).
- Easier to get when home values are high. HELOC and Second Mortgage “combined loan to value” (CLTV) ratios are capped at 80% in Texas and they go up to 85% to 95% (depending on the bank) in CA. Because of these CLTV limits, HELOCs are also much easier to get when home values are high – for obvious reasons. I don’t expect values to fall for reasons explained in many of my previous blogs, but if they do, borrowers would be wise to have their HELOC locked in now.
- Liquidity, baby! This is the biggest reason because HELOCs and Second Mortgages are easy to obtain and are wonderful sources of liquidity in the event of a pay cut, a job loss, a medical emergency, home improvement needs, tuition bills and much else. They are also great resources for even wealthy borrowers who might not want to sell assets to raise cash – to avoid income tax issues or selling at the bottom of a market cycle.