Refinancing a Home to Buy a Second Property

We’ve all heard the saying: “Real estate is an investment.” Rather than throwing money away on rent, homeowners are able to pay down the cost of their houses through mortgages, which go directly into the property’s ownership. Similarly, real estate assets usually increase in value over time, allowing investors and homeowners to make money on strategically-purchased properties. Few people, however, understand how they can use their current homes to purchase second homes. As with most investments, real estate allows homeowners to utilize lines of credit. In refinancing your home, you can fund children’s educations, other large-scale investments, and second homes. Home equity, as realized through a refinanced home, is one of the best ways to expand your investment.

In simple terms, home equity is the market value of a homeowner’s unencumbered property interest. This number is the difference between the home’s fair market value, as determined by an appraisal, and the outstanding balance of all liens on the property. Equity increases as the debtor, the homeowner, makes payments toward the mortgage balance. Equity will also increase as the property value appreciates. Homeowners may acquire equity from their down payment and the principal portion of any payments made against the mortgage, as well as from property value increases. This line of credit is often used as collateral for a home equity loan or home equity line of credit, also known as HELOC. This financing is provided by a lender who agrees to provide credit using the home itself as insurance.

 

Home Equity Lines of Credit

HELOC is an excellent financial tool. Homeowners can receive a line of credit for up to 90% of the appraised value with no closing costs. The appraisal itself is often the only out-of-pocket cost, and no reserves are necessary. The best pricing is awarded to those with credit scores over 740, but HELOC is available to most individuals with credit scores over 700. The interest rate is often significantly lower than most loans, starting at 3.75% for the first six months and dropping to the prime rate for the remaining repayment period. Users can submit interest-only payments for the first ten years, after which they will pay the principal plus interest for the last twenty years. The HELOC must remain open for three years, but the balance can remain $0 if you have utilized all funds.

Utilizing home equity or HELOC can be a scary experience for homeowners. In most cases, a home is a consumer’s most valuable asset, and failure to repay a HELOC or home equity loans can result in foreclosure. In fact, HELOC abuse is often cited as a major cause of the subprime mortgage crisis in 2007. However, the money available through this type of refinancing is generous, and lenders are often more willing to provide these funds than other types of loans—using a home as collateral is meant to guarantee prompt repayment. If you are looking for ways to finance the purchase of a second home—or, perhaps, a remodel, education, or large medical bills—HELOC and home equity loans should be carefully and strategically considered.

 

Home Mortgage Interest Rate Forecasts

Mortgage interest trends are an essential factor to consider when deciding the type of loan you want to finance your new home. Rates have been trending upward in recent months, and the next few years will be no exception. Below, we have included our forecasts for home mortgage interest rates—both short-term and long-term. If you want to mortgage a home, do so now; rates are expected to rise steeply for the foreseeable future.

 

Short-Term Rate Forecasts

Forecasting the interest rate in the short-term involves a lot less uncertainty.  Comparing one recent forecast, the average interest rate for July of 2018 is currently 4.53%. Anything under 6% is considered “good,” meaning borrowers are still reaping the benefits of relatively low interest rates. However, if you are planning to lock into a fixed-rate mortgage in the next year, do so very soon. Current projections place September and October of 2018 as the lowest rates for the next twelve months—4.45% and 4.46%, respectively. After that brief lull, rates are expected to shoot up, hitting above the 5% mark for the first time in March of 2019. The Federal Reserve is continuing to raise its benchmark rate, which will continue to raise interest rates across the housing market. Currently, mortgage rates are higher than they have been since 2011, but average homes were around $100,000 cheaper seven years ago. If you’re planning to purchase a mortgage, do your research and see what you can find with a stable interest rate. Then, cash in ASAP.

 

Long-Term Rate Forecasts

Though long-term mortgage interest rates are more difficult to forecast, figures are currently available through 2022. In a thirty-year mortgage, a four-year forecast is hardly helpful. However, the general trend is enough to inform and educate potential borrowers on the affordability of their loans. As mentioned, the average rate for July of 2018 is 4.53%. Over the next four years, that will increase to 5.44% (July 2019), 6.82% (July 2020), 7.00% (July 2021), and 7.59% (July 2022). These increases are intimidating but should be carefully considered prior to making any borrowing plans. For more detailed, month-to-month projections, click here.

Long-term mortgages and insurance rates come with a lot of uncertainty. Currently, rates are projected to increase steadily for the foreseeable future. If you’re planning to purchase a fixed-rate mortgage, do so now—rates will only continue to rise. Additionally, those with variable rates should expect to see their monthly payments increase with rate changes. Fixed-rate mortgages are influenced by what’s happening in the bond market, which has remained relatively stable. Variable-rate mortgages use the prime rate as a base, resulting in historically cheaper rates than with short-term fixed-rate mortgage. However, these long-term dramatic increases mean larger payments over the life of the loan. If you are currently torn between a fixed- and a variable-rate mortgage, the fixed option is, inevitably, the safer option. Interest rates are expected to hit 8% in the next four years—nearly double the current rate.