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Reposition Your Debt with New Home Equity Programs
by Bob Kerlin
Many homeowners out there face a common problem. If they bought their home several years ago with a 95% loan to value mortgage, and the property has not appreciated in value, the house has very little or no equity. While many of these homes are still in need of basic repairs, homeowners must choose between fixing basement leaks or putting on a new roof and paying college tuition while continuing to pay down monthly credit card debt and other fixed expenses.
Today, there are new loan products which will allow homeowners to reposition debt by borrowing money for home improvements even when there is little or no equity in the house. First, a little background on debt repositioning. Since the Tax Reform Act of 1986, interest on consumer debt - credit cards, personal loans, car loans or revolving credit - is not tax deductible. Interest on loans secured by real estate, however, such as a home mortgage, is fully tax deductible in most cases, up to the value of the house. Borrowers should check with their accountant to verify their personal situation.
Over the years, much has been reported on the rise in consumer debt, especially the abuse of credit cards. At the same time, however, consumers have had to weigh keeping up with rising educational expenses with the desire to adjust their personal balance sheets. Consequently, since 1986, many Americans have used traditional home equity loans to pay large consumer debts. Most home equity loans go only to 80 percent of a home's current value, excluding anyone who purchased in the past five years with a downpayment of less than 20 percent. There are several reasons why most people want to reposition debt, some are: consolidate high interest non deductible consumer debt, finance a home improvement,re-pay a 401(k) loan, re-pay a balloon second mortgage that is coming due, make a lump-sum divorce or alimony payment, buy a partner's position out of a house, or pay large bills such as tuition, a car, boat or piano.
Even though the loan is secured by a second mortgage on the property, it is really a cross between a real estate mortgage and a consumer loan. The loan is granted on a person's ability to re-pay and not on the equity in his or her home.
Here are a couple of real case examples in which homeowners have repositioned their debts, included them on their home mortgage and thereby improved their cash flow:
· A single mother had borrowed from her 401(k) plan at work to pay her two children's college tuitions. She then took out a $47,000 debt repositioner loan to re-pay her 401(k), pay the coming year's tuition for both children, pay off credit cards and a credit union loan and make some modest home improvements.
· A married couple was able to pay off ten credit card balances for more than $40,000, receive $5,000 cash at settlement and lower their monthly payments by more than $300 a month.
Loan Requirements
The basics of the program are as follows: Loan amount - maximum $75,000; no more than $125% of the home's total value, Equity in property - not necessary; total of first and second mortgages capped at 125% of home's value, Length of time residing in property - no time limit; may apply right after settlement, first -time home buyers must have excellent credit, Ownership - must have at least 50%, Investor loans - not allowed, Property types - single-family home or town house; condos limited to 90% of value; no coops, Schedule of improvements - must be stated on loan application, Interest rate - depends on credit report, Loan term - maximum 20 years, fully amortized, Money needed at application - nothing; $150 appraisal fee must be paid prior to closing, Loan position - must be second only, Total debt ratio - may need to be slightly lower if there have been credit problems, Debt repayment - all debts, credit cards installment loans, tuition bills, improvement estimates, personal loans, 401(k) loans, medical or other bills paid at settlement and noted, Credit - first mortgage must be current, prior bankrupcy must have been discharged three to five years prior, Co-Signers - not allowed, Interest deductibility - yes, in most cases, but always consult a tax specialist, Processing time - usually 10 business days from application to settlement, Documentation needed - copy of original settlement statement, deed, deed of trust, note, past two years' W-2s, three months' pay stubs; self-employed borrowers will have to have two years' complete tax returns and a year-to-date P & L statement, Improvements allowed - no restrictions, luxury items allowed.
Here are some frequent questions that are asked about the debt repositioner:
Q If I have faced some credit problems in the past, does that automatically disqualify me?
A Not necessarily. A borrower's credit is determined by a credit score. If an applicant's score is below a certain number, he usually can't get the loan. All past credit problems and recent inquiries must be explained in writing. The major criteria are good credit, showing the ability to handle debt, and adequate, documented monthly cash flow.
Q I have other considerable assets. Does that help?
A Unlike other mortgages, the loan is based on a borrower's assets and his past use of credit.
QHow are consumer debts discharged?
A All debts that the homeowner wishes to settle are submitted to their attorney prior to the closing. At settlement, all creditors are paid directly based upon the bills submitted at application.
Bob Kerlin can be reached on-line at rkerlin@erols.com.