Put money down on 1st loan or second loan.

[Avani]

Dear gurus,

I needed your help in knowing a little more before I make a decision.

I have a loan on a condo in Virginia which is my primary home.

Mortgage amount is 252,000 which is 30 year fixed 1/5 ARM.
Home Equity line is 63,000 which is the 20 percent of the total loan.

The loan I got on the property is for total of 315K. I have not paid any money so far to build any equity for the past 2 and half years. It is interest only loan.

At present the value of the house has tanked down by good 20K.

I have about 50K in cash that I am planning to put into this loan to build some equity.

What should I do?

Option 1: pay off the home equity line loan in full, since the interest rate is higher on this.

Option 2. Refinance the whole loan ( I am not sure if that is possible). I wanted to bring down my payments so that I can free up some cash.

Option 3. Refinance my home equity loan only. I heard that is possible. But I wonder if I so do that, if so how is it going to help me if the mortgage loan matures in 2 years.

I understand that refinancing costs money. Closing cost and stuff. It would be great if anyone could suggest me a way to evade this since I am ready to put 50K cash into the property.

Any help would be really appreciated.

Thanks for reading.

Avani

[Moe Bedard]

Hi Avani,

Welcome to the forum and thank you for joining...............

I am going to see if Steve can reply to your questions and concerns here.......just wanted you to know that we received your question and Steve should be able to help.......

Hello Avani,

You have a very good question, and actually the strategy to consider is not that much mortgage based. There are many schools of thought debating this question, but I'll give you my spin, based on my mortgage experience.

A couple of things to be aware of. With the current business climate in the mortgage world, refinancing that 2nd is really not great of an option. 2nds right now are very tough to get because Virginia is in a declining market area. The fact that you are all ready upside down, just compounds that.

Forget Refinancing.

You might consider this. Contact the lender of the 2nd. Tell them that you will pay the 2nd down to 100% combined loan to value if they will lower the interest rate down to the 6%-8% range.

Personally....unless the payment on the 2nd was killing me, I would keep the cash in a bank account earning a little bit. People may chastise me for saying this, but in a down economy like this, having a strong cash position is very important.

Cash is King.

Just my $.02

[Avani]

Steve,
thanks much for your inputs.

I hear you that cash is king, and I totally agree with that...Hence, I wanted to know what would be best use of this cash. Of course I want to bring the interest rate down as well as build some equity on the property.

You wrote:

You might consider this. Contact the lender of the 2nd. Tell them that you will pay the 2nd down to 100% combined loan to value if they will lower the interest rate down to the 6%-8% range

but then the interest rate I am paying right now on the mortgage (252K) is 5.85percent. The other home equity loan is variable. The lender for both the loans are Wells Fargo. And the other day I got a call from them asking me if I wanted to refinance the second loan (home equity). In fact, right now I have the cash reserve to pay off the entire second loan ( 62K)...

could you please tell me what is combined loan to value and which loan's interest rate should come down to 6% to 8% range?

I am little confused. But forgive me for my ignorance.

I much appreciate your time and help in this regards, Steve.

Avani

Combined loan to value is calculated as:
!st mortgage loan amount + 2nd Mortgage loan amount = Combined loans

Divide value into total loans to get the combined loans to value.

For instance: $252,000 + $62,000 = $314,000

You indicated you have lost +/- $20,000 in value, therefore value = $290,000

$290,000 divided into $314,000 = $108%

In order to refi, Wells is going to require you to pay $$$ against the existing balance on the equity line. How much??? Don't know.

Talk to the Wells rep to have them caculate all that for you. The rate would be in the 7-8% range depending on your credit + actual appraised value.

[Avani]

Steve,
thanks much for the explanation of loan to value. I see that now we the negative equity on the property, getting a loan is difficult you said.

But I got a call from wells fargo other day asking me if I would want to refinance the home equity loan. Which is 20 percent of the loan at a variable rate.

I also got invitation from INGDIRECT( I have savings account with these guys and also the IRAs). They are offering me loan of 220,000. The rates are also great.

My question is, what if I were to refinance some part of my loan with wells fargo via borrowing monies from INGdirect. I know they are not offering me the whole combine loan to value, but how does it really work. I am now confused that some part of the loan will still be outstanding with wells fargo while some of the it will be with INDdirect????

Please help me again to understand how it really works...

Also, I would like to know if I were to put 50k down payment on refinancing, is it tax deductible on my earnings for the year?

Thanks in advance.

Avani

[Avani]

Home Equity Loan.


I also had one more question. What if I payoff the home equity loan in total...

And then borrow the money from my home equity loan to payoff some part of the first mortgage.

Is this doable? And/or is this advisable?

[takeastep]

Avani,
There are various theories on what to do, depending on one's objective.

More aggressive approach:
Leverage: Pay the minimum amount, put as little down, and hope and pray for appreciation (ouch) today. With appreciation your ROI (rate of return) can be extremely high, without any appreciation you are playing with fire.

Old fashion conservative approach:
Pay down the highest interest rate loan, and apply more funds towards principal which has an accelerated effect of principal reduction.

As Steve mentioned cash is king and at a high demand. Your LOC is like a large credit card where you can pay down the balance and access funds at a later date if needed. The only risk/challenge you are facing is if the 2nd decides to freeze the LOC after you pay it down, then you won’t have access to your funds anymore.

[Avani]

Thanks Much my friend for your time and thoughtful reply.