Access “Trapped Equity” without Refinancing
January 22, 2024
American homeowners have a record amount of equity in their home. Many of these homeowners would like to cash out part of that equity but don’t want to trade an historically low interest rate for one that is as high as it’s been in 20 years.
Instead of refinancing their home, an option is to get a fixed-rate second-lien. This is different than a HELOC, home equity line of credit, which gives you continual access to your equity at a variable rate. A HELOC has a draw period where you only must pay the interest.
A second mortgage is a loan against the equity where the homeowner will receive a lump sum and will make payments to repay the loan and interest over a specified period. Generally speaking, lenders want the combination of the existing first-lien and the new second-lien not to exceed 75-80% of the home’s current value.
To calculate how much would be available in a second-lien, subtract the existing unpaid balance on the first-lien from 75-80% of the home’s current value. The remaining amount would be available in the form of a second-lien mortgage.
The borrower, which is the homeowner, would have to qualify for the new second mortgage with sufficient income, acceptable debt-to-income ratios, good credit, and other underwriting requirements.
The advantage of this option is that the homeowner retains the lower interest rate first mortgage which may represent a larger percentage of the value of the property. The second mortgage will have a higher interest rate but will only be on a smaller percentage of the value of the property. The blended rate of the two mortgages will be less than the cost of refinancing the home at current interest rates.
Your lender can run an analysis to determine the blended rate on your first and second mortgages so you can see the benefit of keeping your low rate first mortgage in place and accessing your equity through a fixed-rate second mortgage. Sources for home equity loans could be traditional banks, community banks, credit unions, mortgage brokers, and mortgage companies.
A fixed-rate second mortgage is a solution for homeowners who would like to cash out part of their equity but feel trapped because they don’t want to trade an historically low interest rate for a much higher one.