Should You Take Out a HELOC to Pay Off a Mortgage?
Those who understand the basics of a HELOC, or home equity line of credit, tend to sing its praises. They know just how useful those loans can be when you’re trying to remodel your house or have unexpected expenses. But what about using a HELOC to pay off a mortgage? Is this even a good idea?
Since a HELOC is a loan that uses the equity in your house as collateral, it makes sense that you’d want to use it to pay off your mortgage. That would ideally leave you with one single loan. However, there are several pros and cons here that need to be gone over before.
Heloc Vs Mortgage
Before we can start going through the pros and cons of using a HELOC to pay off a mortgage, we first need to explain the differences between these two loans. Although there is no clear winner when comparing HELOC vs mortgage, as both have their good and bad points, both of these loans are quite different. A HELOC is a loan that’s taken out on the equity in your home. This is the amount that’s available when you subtract the amount that you owe on your mortgage from the overall worth of your home. A mortgage, on the other hand, is a loan that’s taken out in order to purchase or refinance a home. Those funds are set into a fixed loan for that single purpose. This makes it quite different than a HELOC, which is designed kind of like a bank account in that you can use the money, pay it back, and then use it again. For this reason, some people wonder if they could use a HELOC to pay off a mortgage. You can always check out our site for these types of tips, or a reputable HELOC information site to keep up to date. The concept of going down to this one single loan is quite appealing. Before you start to contemplate HELOC vs mortgage, it’s important to consider the following points.
How Much Is Left On Your Mortgage?
One important thing to think about before you make your HELOC vs mortgage choice is whether or not you have the funds available on your HELOC in order to pay off your mortgage. Plus, you need to understand that the closer you are to paying off that mortgage, the more your payment amounts go straight to the principle. However, if the overall worth of your home has gone up considerably and your mortgage is fairly small – yet has years left to go – then you could use a HELOC to pay off a mortgage.
Are You Eligible for a Heloc?
Another factor is whether or not you’re eligible for a HELOC as far as your credit is concerned. If you received your mortgage more than seven years ago and have damaged your credit rating since then, you may not be able to take out that additional loan. In this case, then you clearly won’t be able to use a HELOC to pay off a mortgage. This leaves the mortgage as the best option when weighing the HELOC vs mortgage loans.
Other Pros and Cons
On top of the responses to those two questions, there are some additional pros and cons that must be considered when trying to choose whether or not to use a HELOC to pay off a mortgage. Let’s work through them one by one.
When trying to choose whether or not to use a HELOC to pay off a mortgage, it’s really up to you. There are a number of different factors, some of which can help you choose which is the most important to pay off first – HELOC vs mortgage. Both have their own sets of pros and cons, although the HELOC is much more flexible.
you about to start the home buying process? Are you currently in the process
and you feel overwhelmed with the process of home buying? You’re not alone.
Homebuyer surveys find that more people today want to buy a home, but challenges
such as saving for a down payment and student loans are keeping them sidelined.
We know the vast majority of buyers (92 percent) use online
search at some point in their home buying process. Maybe that’s how you found
me at www.bobrutledge.com!
But, before you start picking out your dream house online, take
a minute to make sure you grasp these 7 key facts about homeownership.
1. Go back to school (for a day). We know you
probably just Goggled “how to buy a home,” but did you know there are homeownership
education courses that can really help you prepare? Homebuyer counseling is occasionally
required when using a down payment assistance program, but any buyer can
benefit. You’ll learn about the home buying process, improving your credit,
mortgage terms, planning a budget and more. Plus, a new study finds that by
simply participating in these in person or online courses, you’ll reduce your
risk of foreclosure by 42 percent.
an agent. If you aren’t yet a homebuyer, there’s no reason not to have a
real estate agent. Your agent’s commission will come from the home you
purchase, not your pocketbook. Everybody wins! Even if you don’t think you’ll
need help with lots of showings, a real estate agent will help you navigate
contracts between you and the seller and set up important things like the home
inspection. As a new buyer, you’ll benefit from the expert help.
the right lender. (PICK ME) Your mortgage lender will help you
secure your home financing—and, there are many types of banks and lenders who
can help. Unfortunately, according to the Consumer Financial Protection Bureau
(CFPB), nearly half of homebuyers don’t shop around for a mortgage lender. Like
you, your finances and home buying goals are unique. So, it makes sense to shop
around and interview your lender for the job. Find a lender that can work
within your parameters and not their own, too many lenders will make YOU
credit score matters. The type of loan you get, including
interest rates and points paid, is primarily determined by your credit score.
The better your credit score, the more affordable loan you can get, often with
more options for a low down payment. For low down payment loans, your MIDDLE
credit score needs to be a minimum of 620. Review your credit report, make
adjustments and get prepared so you can enjoy the lowest interest rate possible
and save cash over the life of your loan.
don’t need 20 percent down. You may have heard or read that you
need 20 percent down. It’s not necessarily a bad thing, but that’s just not the
case. And, if using a low down payment can get you in a home now (instead of 3
years from now), you’ll enjoy low rates and get out of a rising rent situation.
Low down payment options have been around for a long time. In fact, data shows
that low down payment loans with sound underwriting (loan is fully documented,
income verified) are just as successful as loan with large down payments.
payment programs offer savings. Did you know the average
down payment assistance benefit is more than $8,000? Many homebuyers don’t know
about homeownership programs that can help them get in a home much more quickly
and provide a valuable cash cushion for other home buying expenses. You could
save on save on your down payment and closing costs, or even get ongoing tax
credits. If you would like to see how a low down payment mortgage and down
payment programs can help to get you into a new home with zero out of pocket
expense follow this link to my ZERO PROGRAM.
forget to budget closing costs. Most buyers focus on saving
for a down payment, but your closing costs can run you another 3 to 5 percent
of the sales price. It’s important to factor in those costs so you are prepared
for the closing table. Ask your agent about negotiating those costs with the
seller. In addition, some homeownership programs can help you cover your
2018 Guide to Qualifying for a Mortgage
with IBR Student Loans
you have student loans, qualifying for a mortgage can get tricky.
loan guidelines have changed yet again. This is your ultimate guide to
understanding how these changes will affect you in 2018.
you begin to make payments on your student loans, you may have several options.
be making payments on your student loan based on your income. This is
called an Income Based Repayment (IBR) plan.
plans typically will not cover the principal and interest due, and the loan
balance may increase even though you are making payments.
payment is based on a calculation that pays off your loan in full at the end of
a loan term, this is an amortized payment.
underwriting guidelines with all lenders will allow you to use an amortized
payment when calculating your debt to income ratio.
plans could also leave you with a $0.00 payment, even though your loan is in
repayment status. Your income is reviewed every year to determine your
new payment over the next year.
Loan Payment Change History
and more students are straddled with student loan debt for years after leaving
chained to student loan debt requires an experienced locksmith to unlock the
correct guidelines to get you approved for a home loan.
almost a full time job keeping up with the updates to the underwriting
guidelines, and IBR payments seem to send many loan officers into a tail spin
Loan Guideline Changes Since 2015
2 times for Fannie Mae Conventional Loans
2 times for Freddie Mac Conventional Loans
1 time for FHA Insured Loans
2 times for VA Guaranteed Loans
1 time for USDA Guaranteed Loans
first major change to the underwriting guidelines happened when lenders were no
longer allowed to ignore deferred payments or loans in forbearance.
second major change was that you had to apply a payment to any student loan
balance. If the payment reporting on your credit report will not pay off
the loan at the end of a fixed term, your payments are not amortized.
payments became public enemy #1 by Fannie Mae, FHA,
and USDA. In 2015, Freddie Mac guidelines did not allow for deferred
payments or loans in forbearance, and would allow IBR payments, even if the
reported payment is $0.00.
Your Debt to Income Ratio (DTI)
entire student loan debacle is being caused by confusion around how your debt
to income ratios are calculated.
debt to income ratio is calculated as your proposed housing payment (when
buying a home) plus your monthly liabilities from your credit report, as a
percentage of your gross income.
using a Fannie Mae or Freddie Mac Conventional loan, the total housing payment
plus monthly liabilities cannot exceed 50% of your gross income, or a 50% DTI.
using a FHA mortgage have 2 DTI ratios. A front-end debt to
income ratio is your housing payment as a percentage of your income. A
back-end debt to income ratio includes your monthly liabilities from your
will allow your housing payment to be as high as 46.99% front-end DTI, and a
maximum 56.99% back-end DTI including your debts.
loans become confusing when no payment is reported on your credit report, or
when your payment is an Income Based Repayment (IBR) payment.
Student Loan Guidelines Snapshot
Non-amortized Payment – IBR Ok, even with $0.00 payment – Updated
Amortized Payment – Ok with all lenders
Deferred or forbearance use 1% of loan balance.
Non-amortized Payment – Must use .5% of loan balance – Updated
Non-amortized Payment – Not Allowed | Must use 1% of loan
Non-amortized Payment – Not Allowed | Must use 5% of loan
balance divided by 12
Non-amortized Payment -Not Allowed | Must use 1% of loan balance
and Fannie Swap Guidelines
enough, Fannie Mae and Freddie Mac have since swapped positions on IBR payments
as of the most recent update by Freddie Mac in February 2018.
Mac no longer allows for IBR payments, while Fannie Mae does
since April 2017. Fannie Mae will even allow an IBR payment with a $0.00
have an IBR payment that is equal to less than .5% of the balance of your
student loan, Fannie Mae is your option for being able to use the payment as
reported on your credit report.
Solutions to Solve Student Loan Problems
are trying to buy a home, and the pieces just aren’t fitting together, here are
some creative solutions that past clients have successfully done.
Deferred or Loan in Forbearance
have loans with deferred payments, or if your loan is in forbearance, we have
had homebuyers go into an income based repayment plan, and qualify using a
Fannie Mae Conventional
Co-Sign and Pay Student Loan Payment
Mae recently updated their “Contingent liability” guideline to allow student
loan payments to be ignored, if you can show that a co-signer has made the
payments for the past 12 months.
Income Ratio too High for Conventional
home buyer is consolidating over a dozen loans into a 30 year amortized
payment. We needed an amortized payment to take advantage of more
flexible DTI requirements over Conventional.
Not Showing Up on Credit Report
loan is in repayment, your lender can get a credit supplement (if needed) from
the credit bureau by providing them with a copy of your statement from your
student loan lender.
Less than 5% Down Payment and IBR Payment
It is a
common misunderstanding that FHA offers the lowest down payment. VA &
USDA offer 100% financing, but additional qualifying is required.
Fannie Mae and Freddie Mac have programs that allow for as little as a 3% down
payment. Eligibility can be determined by income limits, or the area you
are buying in.
are no income limits for homes being purchased in “targeted” low to moderate
income. These special programs also include discounted mortgage insurance
and discounted closing costs.
Lenders Get it Wrong
you’re calling from a TV, radio, or internet advertisement, you are most likely
being connected to a call center, where the “Loan Officer” has little to no
actual mortgage experience. You can look up the experience of your Loan Officer
and see when they got their mortgage license and what they were doing before
they became a mortgage loan officer. (YOU
WILL BE SURPRISED!)
these “big box” lenders. These lenders are amazing at processing a
certain type of loan file that does not require anything too far outside the
box. They only want and really can only do the vanilla stuff.
are working through a big box lender, here is what is really happening, your
application is not getting in front of a professional until it reaches the
times, your file is not in front of the underwriter until after you’ve already
accepted your purchase offer and paid for the appraisal.
there’s enough time, and the underwriter is experienced enough to look up the guidelines,
and can figure out how to save your new home by getting you approved for the
wouldn’t believe this happens as much as it does if I didn’t see it professional
so often! So many of these horror stories we hear could have been avoided
if a professional loan officer was used, and not a call center lender.
with an Expert
Pros and Cons of a Low Down
When it comes to a down
payment on your home, are you aiming high or low? The down payment is the
number one reason most buyers wait longer than they’d like to buy a home. In
fact, many sidelined buyers have the income and qualifications to make the monthly
mortgage payment, but lack the down payment.
But, there’s also a
misperception about 20 percent down. In a NerdWallet study,
44 percent of Americans believe you need 20 percent or more to buy a home. The
reality is that about 60 percent of homebuyers financed their purchase with a 6% or less down payment,
according to the National Association of REALTORS®.
But, how low is too low
for your down payment?
The fact is there are no
cookie cutter mortgages — your home financing will be as unique as you. FHA is
known for their low down payments for first-time homebuyers, but many
conventional fixed rate loans offer lower than FHA’s 3.5% down.
What about zero down? VA
loans for armed service members and qualified veterans provide a great value,
including no down payment, relaxed credit requirements and no mortgage
insurance. (Plus, down payment programs may help with closing costs and even an
In certain areas there is
the USDA Mortgage that also provides a zero down payment option, low interest rates,
relaxed credit guidelines, but with income restrictions depending on where and number
of people to live in the new home.
Some lenders offer grants
to buyers to overcome the down payment hurdle. But, according to guidelines
from Fannie Mae and Freddie Mac, lenders can make contributions to a borrower’s
down payment or closing costs only after the borrower has contributed a minimum
3% down payment.
“To meet that 3%
threshold, the borrower can still come with funds from a relative, a government
agency — such as grants from a housing finance agency — or from an employer
housing program. That has not changed,” says Lisa Tibbitts, a spokeswoman for
Let’s take a look at the pros and cons of a smaller down payment.
You can buy a home
sooner. With a lower down payment, you’re putting less down and not
saving as long before you get in a home. It can help you secure a loan at
today’s low rates and avoid any rent increases that may be on the horizon.
You’ll have more reserve
funds on hand. When you buy a home, there are many other related costs,
including home repairs and improvements. With a smaller down payment, you’ll
avoid being “house poor” as soon as you leave the closing table and can enjoy
using some of your hard earned dollars to make the home your own.
Down payment programs can
help. Don’t overlook down payment programs as part of your home
financing. These programs can help boost your down payment savings or even
provide a tax credit for the life of the loan. Some programs provide affordable
first mortgages with a very low down payment.
Your monthly payment will
be larger. When you put less down, your home loan — and monthly payment —
will be larger. Work with your lender to ensure you are comfortable with the
You may be required to
pay mortgage insurance premiums. Some down payment
programs may waive mortgage insurance (MI), but in most cases if your down
payment is below 20 percent, you’ll be required to get MI — it helps manage risk for your
lender and protect them if you fail to repay
the mortgage. It’s important to note that with a conventional, fixed rate loan
and borrower paid MI, you can cancel your mortgage insurance when you reach 20% equity in your home. With an FHA loan,
you must continue to pay MI for the life of the loan.
Could hurt in a
competitive market. Unfortunately, some sellers see smaller down payments as a
negative, although it’s not necessarily true. In fact, the seller may actually
earn less on the home from an all cash buyer with a lower offer. Plus,
some down payment programs will fund your closing costs — something you won’t
have to negotiate with the seller. Put the seller at ease by getting your
financing set up early and documenting it in a letter accompanying your offer.
The bottom line? The
right down payment for you depends on your situation. Weigh the overall pros
and cons of a low down payment and talk with your lender, Bob Rutledge, about what is the best
fit for you. Visit www.bobrutledge.com to learn about low down payment options, VA and USDA zero down payment programs, and down payment assistance.
At the start of many mortgage application I hear my borrowers tell me that they had started the process of 'fixing' their credit BEFORE they spoke with me or any other mortgage lender. This is a mistake that has hurt so many potential home buyers. This is especially true when it comes to collections on your credit report.
have done a great job over the years of convincing consumers that paying off
collections will raise their credit scores. Many are actually surprised to
learn that paying off collections will actually LOWER their credit scores.
Collections are usually reported on the credit as a “9” status or collection
account. This means the account has already been "written off" and
assigned to collections by the creditor. Once an account is reported this way
on the credit report, the damage to the credit score is irreversible, unless
that item is removed completely from the report.
If the account is paid off, the collection company reports that the account now
has a $0 balance, but they do not usually delete the item off the report. The
account has already become a collection, and the risk of the consumer
defaulting on another account is already very high, due to that collection.
So their credit score will not go any higher if it is paid off, because paying
off a collection after the fact, doesn't lower the risk of defaulting in the
However, the DATE OF LAST ACTIVITY is updated to the date the account was paid
off. So if that account was sent to collections 3 years ago, the date of last
activity is 3 years old and the impact to the credit score is not as much. But
if the consumer pays off that collection today, they just update the date of
last activity to today's date, many times causing the scores to go DOWN as a
Crazy isn't it?
Also, if you have medical collections most mortgage programs will not require you to remedy medical collections, in essence....we ignore them. Yes, they may be hurting your credit scores, but there are usually other methods available to you to increase your scores.
Before you start doing your homework to purchase a new home please contact me or another mortgage professional. Allow us to pull your credit report for you and to discuss what is the best course of action to take, you may be surprised how easy it really is to get your credit scores higher.
You Are Not Alone
I recall the feelings that ran through me when I felt compelled to file for a Chapter 7 bankruptcy, I felt as though I was an outcast and ashamed that I could not handle my obligations. For a very long time I barely admitted it to myself much less my friends. Now I realize that I did not have a solid handle on my finances and it took a couple small set backs to put me into the position of bankruptcy. But, when I look back I see a life lesson that was provided to me and has been instilled well into the fabric of my personal life. I will not allow this to happen ever again. It is this exact lesson that Underwriters and Mortgage Lenders are looking for from borrowers when it comes to providing a mortgage approval for a home buyer after a bankruptcy.As a Mortgage Lender I am in a very unique position to provide both experience and knowledge in help my clients when they come to me for help in the purchase of a new home or the refinance of thier current house after a bankruptcy.
TIME AND PROOF
For the sake of brevity I will not get into all the exact rules for every mortgage program, I do at my website, please visit AFTER BANKRUPTCY here I provide what you need to get you approved.Every mortgage program has specific time periods that you must wait after the discharge of your bankruptcy before you get started. Though most of the programs have exceptions to those wait guidelines, for instance the wait period for FHA is normally 2 years, but there is an exception called Back to Work that allows for only a 12 month wait period.
Something that many Lenders fail on is that after a Chapter 13 bankruptcy has been discharged it is possible to be approved for a FHA mortgage after only 12 months! BUT! You can actually get approved for a FHA mortgage while you are still in the repayment period of your Chapter 13! If you have made at least 12 months of on time payments and if your Trustee agrees you are eligible for a FHA mortgage!
The Underwriters will be looking for validation that you have learned from your bankruptcy. They will want to see that if you have current credit accounts that you are making your payments on time. This is important, to re-establish credit after your bankruptcy and especially with a credit card or two.
Applying for and getting approved a mortgage application after a Chapter 7 or Chapter 13 bankruptcy requires a stronger than normal application. To strengthen your application requires COMPENSATING FACTORS. Click on the link for a long list of items that you probably already can bring to your application, here are a couple that are important.....
Housing payment shock, you should not have a large increase in what you are paying currently for housing compared to your new house payment.
12 months of on time housing payment, this is an absolute must. There are exceptions if you are living somewhere rent free.
Keep your total debt to income ratio at or below the recommended guidelines of the mortgage program.
YOUR BANKRUPTCY FIXED A PROBLEM
When I was an Underwriter we were told that a bankruptcy should be seen as the borrower recognizing that they had a problem with thier current financial situation and the method of solving that problem was bankruptcy. Now, let's see that the borrower has learned from that life lesson and they are practicing what they learned.
It takes a mortgage lender that adhers to the guidelines of the mortgage programs and don't have overlays that create roadblocks to your approval. It takes a mortgage loan officer that is willing and able to take on your special situation, don't settle!
If you have questions please feel free to visit my website, www.bobrutledge.com or contact me.