Home equity back in county, and mortgage options follow
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By Scott Sheldon  April 4, 2014 12:00 am

Unlike years past, the Sonoma County real estate market continues to show strong appreciation gains. Homeowners who were upside down in 2011-2012 now have home equity as the demand for real estate continues, despite stale inventory. If you own a house, you now have choices to protect, preserve or leverage your newly acquired home-equity.

Six mortgage options for homeowners 

Quick Tip: home equity is the difference between any amount owed on the home (like a home loan) and the appraised value. More equity means more opportunity.


• Second mortgages: Is it a coincidence banks and credit unions are offering home-improvement solutions like equity lines of credit? Nope, equity is back, so credit risk drops. Couple that with consumer optimism, and banks jump in. For homeowners who already have home equity lines of credit in place, consolidating a first and second into one new loan may be a viable option considering equity lines of credit are adjustable-rate mortgages usually tied to the prime rate (prime will rise when the Fed begins tightening short-term rates in the future). Equity lines are now also available in many purchase situations such as the  80/10/10 program that allows a buyer to purchase a property with as little as 10 percent down using an equity line of credit/second mortgage and not having mortgage insurance.

What to remember: if you plan to refinance your home and you have a second mortgage, your lender will need a subordination from the second lien holder on the property allowing a new first mortgage to go into place, unless you do a first and second consolidation into one note. Rolling a first and second together may be a more beneficial route considering most Sonoma County property owners have accumulated an average of $50,000 or more in equity since winter 2013.

• PMI removal on FHA or conventional loans: Many of the loans taken out in 2011-2012 contained monthly mortgage insurance, a.k.a. PMI. It’s the extra cost every month the lender charges because you didn’t have 20 percent down when you bought your home. Refinancing out of PMI into a coveted conventional fixed-rate mortgage can easily mean a large drop in mortgage payments. In fact, it’s not uncommon at all to save $200-$300 per month when doing so.

What to remember: if you have 20 percent equity or more in your home, you can always refinance out of PMI anytime. The 30-year, fixed-rate mortgages are still just over 4 percent. 

Planning to refinance? Expect a higher interest rate on a conventional loan, especially if the loan being paid off is an FHA-insured loan. While the interest rate may be higher, the total payment will be lower; this becomes a decision based on risk versus reward. Net cash savings could yield long-term benefits, outweighing attempts to remove PMI with your servicer.

Removing PMI Without Refinancing: Guidelines are as follows. FHA monthly mortgage insurance can be removed after 60 months from origination date and 20 percent equity or more in your home. If you meet these two thresholds as a homeowner, the lender still has the discretion to grant or deny your request, not a guarantee. Under conventional minimum time frames, PMI can be removed after 24 months and 20 percent equity in your home by virtue of paying down your principal balance. On a case-by-case basis your servicer could allow you to remove the PMI based upon market appreciation, but again under their sole discretion.


• Restructuring Consumer Debts (credit cards, car loans, student loans, personal debts): If your home appraises high enough, you could wrap your consumer liabilities into your mortgage payment. Here’s an example: taking an increase in mortgage payment by $100 per month in exchange for paying off $500 per month in consumer obligations is a realistic lofty goal offering big upside.

What to remember: A lender can lend up to 85 percent of your home’s value. The key is to prudently save the difference by prepaying the mortgage or building up personal savings.


• Home Improvement: This is essentially inflating the mortgage amount on your home pulling cash out and using those proceeds to improve your home. There are two ways to accomplish this – restructuring your first mortgage or taking out an equity line.

What to remember: get bids upfront so you can have a realistic expectation of the costs associated with your remodel project. Do that first, then line up the financing, followed by starting the construction project. In such situations, it’s ideal to get a range of estimates as financing can always be subject to change based on such factors as credit score, income, debt to income and of course your home’s value.


• Leveraging to acquire other property: Cash out refinancing equity from one property and using that equity as a down payment to acquire another property. A prime example would be to pull funds out of the primary home for the purposes of acquiring an investment property or second home. If the rent can cover more than the mortgage payment, you’re all set.

What to remember: Projected rents can be used to offset the housing payment showing less income but still allowing a consumer to qualify by virtue of having estimated fair market rents considered. For lending purposes, 75 percent of gross rents can be used to offset the housing obligation.


• Moving equity into different home: Becoming a move-up buyer, buying up in bedrooms, bathrooms, square footage, lot size or a combination of any. In previous years, a buyer in Sonoma County could have bought a property with 3.5 percent down, now they have 25-30 percent home equity (paper gain), which could be used as a down payment to purchase another home. Maybe the family is growing? Need more space? Contingent offers are still being accepted even in today’s competitive market.

What to remember: A real estate agent could determine what your house would sell for as a first step. A quality loan officer can then aid you in better understanding of how much more house you could qualify for using the down from the sale of your current home. 

Release contingencies on the sale of your new home when the buyer of your current home releases theirs first, thereby protecting your earnest money deposit.


Scott Sheldon is a local mortgage lender, with over six years of experience helping people purchase and refinance primary residences, second homes and investment properties. Visit him at www.sonomacountymortgages.com.

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