HomeReposition Your Debt with New Home EquityPrograms
by Bob Kerlin
Many homeowners out there face a common problem. If they bought theirhome several years ago with a 95% loan to value mortgage, and the propertyhas not appreciated in value, the house has very little or no equity. Whilemany of these homes are still in need of basic repairs, homeowners mustchoose between fixing basement leaks or putting on a new roof and payingcollege tuition while continuing to pay down monthly credit card debt andother fixed expenses.
Today, there are new loan products which will allow homeowners to repositiondebt by borrowing money for home improvements even when there is littleor 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. Intereston loans secured by real estate, however, such as a home mortgage, is fullytax deductible in most cases, up to the value of the house. Borrowers shouldcheck 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, consumershave had to weigh keeping up with rising educational expenses with the desireto adjust their personal balance sheets. Consequently, since 1986, manyAmericans have used traditional home equity loans to pay large consumerdebts. Most home equity loans go only to 80 percent of a home's currentvalue, excluding anyone who purchased in the past five years with a downpaymentof less than 20 percent. There are several reasons why most people wantto reposition debt, some are: consolidate high interest non deductible consumerdebt, finance a home improvement,re-pay a 401(k) loan, re-pay a balloonsecond 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 equityin his or her home.
Here are a couple of real case examples in which homeowners have repositionedtheir debts, included them on their home mortgage and thereby improved theircash flow:
· A single mother had borrowed from her 401(k) plan at work topay her two children's college tuitions. She then took out a $47,000 debtrepositioner loan to re-pay her 401(k), pay the coming year's tuition forboth children, pay off credit cards and a credit union loan and make somemodest home improvements.
· A married couple was able to pay off ten credit card balancesfor more than $40,000, receive $5,000 cash at settlement and lower theirmonthly 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, Lengthof time residing in property - no time limit; may apply right after settlement,first -time home buyers must have excellent credit, Ownership - must haveat least 50%, Investor loans - not allowed, Property types - single-familyhome or town house; condos limited to 90% of value; no coops, Schedule ofimprovements - must be stated on loan application, Interest rate - dependson credit report, Loan term - maximum 20 years, fully amortized, Money neededat application - nothing; $150 appraisal fee must be paid prior to closing,Loan position - must be second only, Total debt ratio - may need to be slightlylower if there have been credit problems, Debt repayment - all debts, creditcards installment loans, tuition bills, improvement estimates, personalloans, 401(k) loans, medical or other bills paid at settlement and noted,Credit - first mortgage must be current, prior bankrupcy must have beendischarged three to five years prior, Co-Signers - not allowed, Interestdeductibility - 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, deedof trust, note, past two years' W-2s, three months' pay stubs; self-employedborrowers will have to have two years' complete tax returns and a year-to-dateP & L statement, Improvements allowed - no restrictions, luxury itemsallowed.
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 automaticallydisqualify 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 getthe loan. All past credit problems and recent inquiries must be explainedin writing. The major criteria are good credit, showing the ability to handledebt, 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 andhis past use of credit.
QHow are consumer debts discharged?
A All debts that the homeowner wishes to settle are submitted to theirattorney prior to the closing. At settlement, all creditors are paid directlybased upon the bills submitted at application.
Bob Kerlin can be reached on-line at rkerlin@erols.com.