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A Guide to Home Equity Loans

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

Homeowners who need to take out large loans should look no further than their own properties. Home equity loans, often referred to as second mortgages, are a realistic solution to finding the funds, as your home’s equity will be used as collateral when you borrow money. According to an October 2018 Mortgage Monitor Report by Black Knight Inc., Americans have an estimated $5.9 trillion in tappable equity from mortgage properties at their disposal.

Here’s a closer look at what these loans are, how they work and how they’re being affected by the current housing environment. Despite rising interest rates and new tax law reforms, they’re still a relatively safe way for you and your family to get the money you need.

How does a home equity loan work?

Interest rates

Just like the majority of mortgages on the market today, home equity loans usually have a fixed interest rate, which means you’ll pay the same amount in interest over the life of the loan. However, these rates tend to be higher than you would find with a traditional mortgage.

“Interest rates tend to be higher because the loan is in second position,” said Robert E. Tait, a senior loan officer with Allied Mortgage Group in Pennsylvania. “The bank is assuming a greater amount of risk because you’re more likely to pay your initial mortgage first if something happens to your income.”

As of the time this was written, the rates advertised through the LendingTree platform ranged from 4.25% to 6%, depending on how much is borrowed. LendingTree is the parent company of MagnifyMoney.

Terms

Home equity loans operate similarly to traditional mortgages where the loan term is concerned. They are paid on a fixed amortization schedule, or loan term, that’s usually 10, 15, 20 or 30 years in length.

Similarly, when you make a payment each month, you’re paying down a portion of both the principal and the interest. In this case, it’s important to continue making your payments because your home is collateral. If you stop paying, the lender can foreclose on your home.

Fees

“These days, most home equity loans are really inexpensive,” Tait said. “The lender is paying a very small processing fee, people are moving toward electronic appraisals and most of the time, there’s no need for title insurance.”

However, Tait cautioned that although an electronic appraisal is cheaper, the value of the home may come in lower. If that happens, you can always elect to have a traditional appraisal done, but you’d have to pay for it.

In addition to the upfront costs, there are also taxes to think about. In the past, homeowners were able to deduct the interest paid on home equity loans, regardless of where the money was spent. These days, though, the process is a little different. Since the passage of the 2017 tax reform law, interest from a home equity loan can only be deducted if the funds are used to buy, build or substantially improve the home that secures the loan.

Why would you take out a home equity loan?

Because home equity loans are paid out in one lump sum, they can be an appealing solution to a variety of high-cost situations, such as making home improvements, paying off medical debt or financing your child’s education.

However, even though these loans tap into the equity in your home in exchange for payment, they have the benefit of remaining separate from your mortgage. This allows you to keep the mortgage’s current terms, as well as the progress you’ve made in paying it off.

“Interest rates five or 10 years ago were lower than they are today,“ Tait said.

“A lot of the time, you’ll see people who have been in their homes for a while at those low interest rates, but they’ll want to tap the equity in their home to help pay for college. A home equity loan lets them still keep those low rates while getting the money that they need.”

As for whether that benefit has changed in the face of today’s rising interest rates, experts believe there’s still benefit to be had.

“Interest rates are less of a slam dunk than they were a few years ago,” said Kevin Leibowitz, CEO and mortgage broker at Grayton Mortgage Inc. in New York. “But they’re still fairly low from a historical prospective. You’re still paying less than you would for a personal loan of the same value.”

Qualifications for getting a home equity loan

For the most part, qualifying for a home equity loan is a lot like applying for your first mortgage. Just as if you were seeking a traditional mortgage, the lending company will look at a variety of factors, including your employment information and your credit score.

“As a rule of thumb, you need to have two years of W-2s that show stable or increasing income, a credit score of at least 620 and a debt-to-income ratio of 43% or less,” Leibowitz said.

However, for home equity loans, there’s one additional factor that has to be evaluated. Lenders also look at the amount of equity that you have in your home because it helps them decide the amount they’ll let you borrow.

For reference, your home equity can be calculated by taking the appraised value of your home and subtracting the balance on your current mortgages.

Before you start thinking about how much money you have at your disposal, however, know that lenders don’t let you borrow against the full amount of equity you have in your home. The amount you can borrow is typically limited to 85% of your equity.

Additional costs of home equity loans

Though home equity loans may be getting less expensive, keep in mind that the exact fees that you’ll be charged will vary by lender. Some may waive fees as part of their offerings, while others will not.

In general, you should be prepared to pay between 2% to 5% of the loan’s value in closing costs. Below is an explanation of what these costs cover.

Application fee

Some lenders may charge a fee for the initial tasks required to approve your loan, such as running a credit check. These fees, ranging from $25 to $150, may be used simply to ensure that the borrower doesn’t go away.

Home appraisal

As mentioned earlier, in order to find out how much equity you have in your home, the lender must first find out your home’s fair market value. This is done by ordering an appraisal, which can cost between $300 to $400. Sometimes, automated or “drive-by” versions are used, rather than the traditional in-person method.

Document preparation

Some lenders charge a fee to prepare all the documents related to closing. Usually, a lawyer or other financial specialist will complete this task.

Title search

A title search is used to discover the rightful owner of the property so that when you take possession, you can rest assured that you own the property outright. It’ll cost around $75 to $100.

Tips on finding the best loan for you

“Your first call should be to whoever holds your first mortgage to see if there’s a program available to you,” Leibowitz said. “The approval process will likely be easier, and you may get better terms than you would see with some of the larger lending institutions.”

However, regardless of where you do your shopping, do your own research, including gaining an understanding of all loan documents.

“Research the terms of the loan in full — not just the interest rates — before you sign anything, Tait advised. “A lot of times, I see people who are obsessed with getting the lowest interest rate and cheapest fees.”

“I like to say an eighth of a point won’t change your lifestyle, but what could is accidently getting into the wrong product. Make sure you understand exactly what you’re agreeing to before signing on the dotted line.”

Finally, be sure to look into the lender, as well.

“Bottom line,” Tait said, “engage with a person who you trust, who’s been referred to you. Do your research. Talk to them. Get comfortable with who you’re going to use.”

Is a home equity loan right for you?

Taking out a home equity loan is a big decision, but if you’ve cared for your home and worked hard to pay it off, the equity you’ve built may just be one of your most valuable assets. In addition, this type of loan’s fixed interest rate and repayment schedule make it an attractive choice for those who need a lump-sum payment to take care of expenses.

This article contains links to LendingTree, our parent company.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Tara Mastroeni
Tara Mastroeni |

Tara Mastroeni is a writer at MagnifyMoney. You can email Tara here

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How to Host a Successful Garage Sale

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

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Whether you’re prepping for a move or finally cleaning out the basement, decluttering your home can bring you peace of mind — and extra cash. Hosting a garage sale is a great way to get rid of old or unused items. Here are a few tips to help you make your sale as profitable as possible.

When is the right time for a garage sale?

Garage sales go by many names — yard sale, moving sale, tag sale, estate sale or rummage sale — but some portion of the event will likely take place outside. If you’re hosting your sale to get rid of stuff before a move, you’ll likely be stuck to a certain date, but if you have some flexibility, consider mild seasons like spring or fall. No one likes rummaging through old items in the blazing August sun, even for good deals.

How to prepare for a yard sale

While the concept of a garage sale is fairly simple, it’s easy to mess up. Many people who host a sale see little success — often because they failed to prepare. Sure, you can just set your unwanted items out on the lawn and have passersby stop and quickly sift through everything. But when you put in a little work ahead of time, the success of your sale is much greater.

“The more preparation that you can do, the more you’ll probably make,” said Ava Seavey, New York-based garage sale expert and author of Ava’s Guide to Garage Sale Gold.

Schedule wisely. First, you’ll want to pick a day for your sale, ideally a Friday or Saturday.  Then you’ll want to take the time to sort through your belongings and carefully select the items you want to sell, choosing items that people will actually find appealing and will want to buy.

Be strategic about prices. Seavey advised that costume jewelry, furniture and collectibles have the potential to make sellers the most money. However, how you price the items is key to ensuring you will earn what these items are worth.

“A good percentage of people who go to garage sales will pay what you have written down,” Seavey said. While some people will negotiate, if your stuff is priced correctly, people will pay it, she said.

Get the word out. You will also want to focus on advertising your sale in your local newspaper and online using garage sale-specific websites and social media channels. Go ahead and describe the types of items you’ll have for sale to attract the right customers.

Be prepared. You’ll want to make sure you have all the supplies you need, including:

  1. Tables
  2. Tablecloths
  3. Pricing labels
  4. Money apron (to hold cash)
  5. Bags
  6. Paper/newspaper (to wrap fragile items)
  7. Signs (to advertise the sale throughout the neighborhood)
  8. Notebook/ledger (to keep track of items sold and money collected)

This may seem like a lot to do in order to sell a few necklaces, purses or electronics. But this preparation can make your sale more appealing and profitable. If having your own sale sounds too time consuming to prepare, you and a friend, family member or neighbor could have the sale together.

What to expect during your garage sale

On the day of the garage sale, you’ll get a variety of customers depending on what you have available for purchase. If you have advertised correctly and have the right things for sale, you could draw in a large crowd.

“I would have plenty of things for everyone. Those are the best sales, when you have a variety,” Seavey said.

Try to keep the sale going from the morning to the late afternoon. Having a sale that lasts a few hours may hinder your ability to make money because you are limiting how many people will be able to come. If your sale starts in the morning and goes until later in afternoon, you can maximize the profits from the sale because those who could not make it during the morning hours can shop in the afternoon before the sale ends.

“There is no magic time to end, but you will do most of your selling in the morning,” Seavey said. “I like to go as long as I can.”

With the money you make from your sale, you can add to or start an emergency fund, pay past-due bills, or even purchase updated items for your new home if you are moving.

What to do after the yard sale

A successful yard sale will leave a lot of money in your pocket and very few unsold items on your lawn. Consider storing your newly acquired cash in an online savings account that earns you interest. If you’re stuck with leftover items, you can always hold another sale, or you can donate them to a charity, church or secondhand store. You won’t make any money when you go this route, but there are benefits to donating.

“You have unloaded everything, you’ve made some money and you have a tax write-off,” Seavey said. “It’s a win-win-win for everybody.”

A garage sale can be the answer when you want to rid yourself of unwanted items — and even make a little money in the process.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Kristina Byas
Kristina Byas |

Kristina Byas is a writer at MagnifyMoney. You can email Kristina here

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What the End of HARP Means for Your Mortgage

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

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Home values have been on the mend since the financial meltdown of just a decade ago. This has been good news for people who have struggled with negative equity in their homes, meaning the value is lower than the amount they owe on their mortgage.

The percentage of “underwater” homes has dropped significantly, decreasing 16% year over year at the end of 2018 to comprise 4.1% of all mortgaged properties, real estate research firm CoreLogic found. But that means there are still homeowners who need assistance with recovering their equity.A popular government-sponsored refinancing program aimed at helping these homeowners has recently ended, and people looking for help getting above water may not be aware of the other options they have.

In this article, we highlight and explain what the closing of HARP means for homeowners and several available alternatives.

What is HARP?

The Home Affordable Refinance Program, known as HARP for short, is an initiative that helped underwater homeowners refinance their mortgage. The program was introduced in 2009 after the housing crisis.

HARP allowed eligible homeowners to refinance their mortgages to lower their mortgage interest rate or switch from an adjustable-rate to a fixed-rate mortgage even if they were underwater. Typically, lenders will not allow a borrower to refinance if the house is worth less than what is owed.

In order to qualify, homeowners needed to meet the following requirements:

  • No late mortgage payments over the last six months that were 30-plus days behind, and no more than one late payment over the last year.
  • The mortgage you’re attempting to refinance must be for your primary residence, a one-unit second home or a one- to four-unit investment property.
  • Your mortgage must be owned by Fannie Mae or Freddie Mac.
  • Your mortgage was originated on or before May 31, 2009.
  • Your loan-to-value ratio is more than 80%.

The program had been extended a few times, but the last HARP deadline was Dec. 31, 2018.

Fannie and Freddie’s HARP replacements

Government-sponsored enterprises Fannie Mae and Freddie Mac have refinance products in place that are meant to replace HARP.

Fannie Mae’s High Loan-to-Value Refinance Option

Beginning on Nov. 1, 2018, Fannie Mae has offered a high loan-to-value refinance option to borrowers with mortgages owned by the government-sponsored entity. The product is meant to make refinancing possible for borrowers who are maintaining on-time mortgage payments but have an LTV ratio that exceeds the amount allowed for standard refinance options.

Borrowers must benefit from the refinance through a reduction in their monthly principal and interest payment, a lower mortgage interest rate, shorter loan term or by switching to a fixed-rate mortgage. There is no maximum LTV ratio for fixed-rate mortgages; however, the maximum LTV for adjustable-rate mortgages is 105%.

The eligibility requirements include:

  • The loan being refinanced must be an existing Fannie Mae-owned mortgage.
  • The loan must have been originated on or after Oct. 1, 2017.
  • At least 15 months must pass between the loan origination of the existing mortgage and the refinanced mortgage.
  • Borrowers must be current on their mortgage, have no late payments over the last six months and only one 30-day delinquency over the last 12 months. Delinquencies longer than 30 days aren’t permitted.
  • The existing mortgage can’t be a Fannie Mae DU Refi Plus or Fannie Mae Refi Plus mortgage.

Freddie Mac’s Enhanced Relief Refinance Mortgage

Freddie Mac offers the Enhanced Relief Refinance mortgage to borrowers who are current on their mortgage but can’t qualify for a standard refinance because of a high LTV ratio. The mortgage being refinanced must meet the following requirements:

  • The mortgage must be owned or securitized by Freddie Mac.
  • The mortgage can’t have any 30-day delinquencies over the past six months and only one 30-day delinquency in the last year.
  • The closing date for the mortgage was on or after Oct. 1, 2017.
  • The mortgage can’t already be a Relief Refinance mortgage.
  • There should be at least 15 months between when the original loan was closed and the refinanced loan’s origination.
  • The loan can’t be subject to an outstanding repurchase request.
  • The maximum loan-to-value ratio for adjustable-rate mortgages is 105% and there’s no max for fixed-rate mortgages.

Borrower benefits include a lower interest rate, switching from an adjustable-rate to fixed-rate mortgage, shorter mortgage term or lower monthly principal and interest payment.

Alternatives to refinancing when you’re underwater

If refinancing your mortgage doesn’t sound like the best move for you, consider one of the following alternatives.

Mortgage modification

A mortgage modification is a way to change the original terms of your loan without going through the refinancing process. In some cases, you can work with your lender to switch from an adjustable-rate to a fixed-rate mortgage, extend your loan term, lower your interest rate or add past-due amounts to your unpaid principal balance.

Modifying a mortgage could be beneficial for homeowners facing hardship who aren’t eligible to refinance and are delinquent on their mortgage payments or expect they will eventually fall behind.

Mortgage recasting

If you have a lump sum of at least $5,000 in cash, you could potentially recast your mortgage. A mortgage recasting results in lower monthly mortgage payments. You pay a lump sum of cash to your lender to reduce your outstanding loan principal amount, then your loan is reamortized based on the lower remaining principal balance. Your interest rate and loan term stay the same.

This option makes sense if you’re expecting a bonus from your employer, a large income tax refund or some other financial windfall.

The bottom line

Although HARP has come to an end, there are still options for mortgage borrowers with Fannie- or Freddie-owned loans. In order to qualify for the enterprises’ refinancing programs, it’s helpful to maintain on-time payments even when your loan amount exceeds your home’s value.

If you don’t qualify, be sure to strategize on how best to attack your mortgage balance and rebuild equity. Consider making extra mortgage payments whenever possible by freeing up room in your budget, earning extra income or dedicating unexpected money to your mission.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Crissinda Ponder
Crissinda Ponder |

Crissinda Ponder is a writer at MagnifyMoney. You can email Crissinda here

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