The Home Equity Secret Menu. Haven’t heard of it? Well, just like the famous secret menu of In-N-Out , the mortgage industry has a secret menu of its own. Here is everything you need to know about the Home Equity Secret Menu.
Your Situation
So, you want access to the equity within your home? Should you look to refinance your current mortgage or obtain a 2nd mortgage? Does trying to decide make you think of the old Clash song which asked, “Should I stay or should I go now? If I go, there will be trouble. And if I stay it will be double.” Yet, unlike the song, which implies a no-win situation, there are a few easy ways to figure out the best financial option for you.
Just the Facts
Here is the reality. To obtain access to your home’s equity, without selling it, you have two main options.
First, you can simply refinance your current mortgage and pull cash out. Choosing this option usually provides you with access to the lowest current interest rates on the market. Yet, obtaining a new first mortgage can be more time consuming and expensive than obtaining a second mortgage.
Second, you can choose to tap into your home’s equity by obtaining a second mortgage. These loans typically can be completed quickly and often provide access to a greater portion of your home equity than many first mortgages. However, these mortgages usually have a higher interest rate than those available on a first mortgage.
So how do you decide? Which option provides you the lowest overall rate?
The Blended Rate – The Home Equity Secret Menu Item
Let me introduce to your new friend, the Blended Rate. It provides us with the necessary tool by which we can compare the two options above. The Blended Rate is a mathematical equation which allows us to calculate the effective rate when combining two loans. In other words, using the blended rate formula allows us to determine the effective interest rate when combining your current mortgage with a proposed second mortgage. We can then compare this blended rate with a proposed new 1st mortgage rate to see which one is lower.
The Blended Rate Applied
To see how the blended rate is applied, let’s image you have a current 30 year mortgage of $250,000 at an interest rate of 4%. You needed to get $50,000 to complete a kitchen remodel and make a down payment on your daughter’s college tuition. In speaking with a mortgage professional, you were offered a new first mortgage at 4.5% or you could obtain a 2nd mortgage at 7.99%.
Now, let’s apply the blended rate formula (math explained in more detail below). This reveals the effective interest rate of keeping your current 1st mortgage and obtaining a second mortgage is 4.69%. In this case, the lowest interest rate available to you would be obtaining the new 1st mortgage. Yet a small change in your requirements can flip the equation. Imagine your cash out requirements dropped to $20,000. Now, the blended rate formula reveals your effective rate would instead be 4.29%. In this case, keeping your current 1st mortgage and obtaining a second mortgage would provide you with a lower interest rate.
Complimentary Financial Review
At Revival Lending, we work hard to understand the particulars of your situation and find the loan that best helps you accomplish your goals. There is a reason we say, “Your Dream. Your Home. Our Loan Solution.” If you have any question about this scenario or your own financial situation give me a call and I will be happy to conduct a complimentary financial review of your situation.
P.S. – Now make sure to apologize to your high school math teacher and parents for saying you would never need this algebra stuff in the real world.
P.S.S – If the mere mention of In-N-Out has made you hungry, here is a guide to their secret menu.
Blended Rate Formula Explained
Blended Rate = (r1*b1 + r2*b2)/tb
r= Rate, b= Loan Balance, tb= Total Balance
Example 1: (4%*$250,000 + 7.99%* $50,000)/$300,000 = 4.69%
Example 2: (4%*$250,000 + 7.99%* $20,000)/$270,000 = 4.29%
Note: Above Blended Rate assumes the same loan term for both loans