What to do inherited second home w/ mortgage and equity loan?

12 years ago

My father placed his summer house in Cape Cod in my name with a quick claim deed 8 years ago. He took out an equity loan a couple of years ago, and over that time, borrowed $48,000 before he died in January. My husband died unexpectatntly in March, and I think my best plan now is to sell it. It is going on the market in July, as soon as we change old carpet, replace a window, trim, etc. In the event that it doesn't sell in a range that works for me, I will rent it for the year, and try again next spring.

If I have to rent it, I wanted to look into refinancing. Current mortgage is $1363, house was appraised at $409, the principal on the loan is 138,000.

I need to know what to do with the equity loan. It's $120 a month, I have been paying $200 a month to reduce it out of my checking account. My son says I should pay if off out of my savings, that I will get it back when it is sold, b/c I am going to have to pay it off one way or the other. I'm hesitant to take such a large chunk out of savings.

My brothers say if we have to rent it for a while, then to refinance both loans into one. It sounds too simplistic, and can that actually happen so the $48,000 is worked into a refinance, and if I were to sell it later, than I have escaped paying it off?

Thanks in advance,

Sandy

Comments (11)

sandyinva
Original Author
12 years ago
Just realized that if it is refinanced then it will be added onto the current principal, raising it to about $200K, it doesn't come out of my pocket, put decreases what I would get back in a sale. My goal is to purchase a smaller home for myself on the Cape after the sale of this home. How do I determine which would be the best option?
feedingfrenzy
12 years ago
I don't think you need to do anything right now. If the house sells at a satisfactory price, then both the first mortgage and the equity loan balance will be paid off at the closing, and the balance (minus agent's commission, if your using one) will go to you.

You definitely should NOT pay off the loan with your savings. That cash provides you with financial flexbility that you will lose if you pay off the loan. A recent widow should hang on to her cash reserves until life settles down and her financial situation becomes more certain.

If the equity loan is a HELOC with a floating interest rate and the house doesn't sell by the end of the summer season, you probably should do a refinance and combine both loans into one so that you don't have to worry about the possibility of rising interest rates inflating the size of the HELOC payments.
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Yes, a home equity loan and a second mortgage are practically the same thing. You will see lenders using both terms. Technically, a home equity loan would not have to be a second mortgage. For example, if you owned your house free and clear (no mortgage), a loan against it wouldn't be a second mortgage, but would be a first mortgage. But the key point to remember is that whichever term they use, they are placing a lien against your home which is securing the loan. The best place to shop for this type of loan is at financial institutions where you currently do business or that are known to you. The first place to check is the mortgage company that holds your first mortgage. They often offer good deal to current customers. That's not to say that some of the lenders who advertise for customers aren't offering good deals -- some are -- but you have to look especially carefully at the closing costs and other fees with lenders who do a lot of mass market advertising. (Of course, you need to check these fees with any lender.) Often lenders will roll the closing costs back into your loan, so that you may get a check for the $10,000 you are seeking, but you may actually be borrowing more than that. In some cases, quite a bit more. Often a good time to get a home equity loan is when you refinance your home. If you are currently paying above market interest rates, consider refinancing and obtaining a home equity loan at the same time from the same lender you refinance with. Often in this case they'll give you a home equity loan with no additional closing costs. As far as the rates you've been quoted, the 4.75 percent seems closer to what I see being offered around where I live. The rates should apply to any amount of loan, not just to large amounts. In fact, many lenders will offer you a home equity line of credit instead of a straight home equity loan. Instead of giving you a check for the amount of your loan, you'll get a check book which allows you to write checks against your line of credit. This is preferable because you don't start paying interest on the money until you actually need it, and if you never need the whole $10,000 available in your credit line, you never actually borrow it. The balance on your home equity line of credit can go up and down just like a credit card balance, and you pay interest on just what you owe. With any loan, just be sure to understand all the fees and costs associated with it. Some lenders, especially those who advertise in the mass media, try to downplay or even hide the fees, and this can mean that what looks on the surface like a good deal isn't such a good deal once you dig down and see what you're really paying.
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You should run the numbers to see which way is actually the least costly. Then after you know that you can consider other factors such as your ability to actually make payments, speed of paying off debt, etc. Take the outstanding balance of your existing mortgage with the current rate of interest you have and figure out your current yearly interest. For example if your existing loan has a $250,000 balance and your current rate is 6 percent, you'd take 250,000 x .06. In that example the current yearly interest is roughly $15,000. Then take the projected new balance after you add in the other debt plus refinancing costs and compare the yearly cost. Going back to this example, if you're going to add $85,000 of debt to your mortgage and go to a 6.5 percent rate, the new numbers would be an outstanding balance of $335,000 and an interest rate of .065, for a yearly interest cost of roughly $21,775. In this case going with the home equity line would be slightly less costly, because that would cost you $6,456 a year in interest, whereas the refinance is going to cost you $6,775 a year in interest. Of course, your own numbers may or may not work out that close. If the 6.5 percent mortgage represents a rate reduction over what you're payiing now, it's a lot more likely to be attractive to roll your debt into the first mortgage than it is if you have to go to a higher rate. And if you do go to a higher rate, how much higher you're going makes a big difference, too, in how these numbers actually are going to figure out in your own case. A final factor to consider is how you actualy plan to pay off this debt. Paying interest only on a home equity line can buy you a few years of a lower payment, as compared to rolling all that debt into your first mortgage. Yet you're not actually retiring any of your debt, so that only makes sense if in the next few years you plan to sell your house and pay off the home equity line with part of the proceeds of the sale, or if you anticipate getting some other chunk of money in the next few years that will allow you to pay off that home equity line. If you're going to stay in your house for a long time and will be paying off the outstanding debt little by little, refinancing the first mortgage probably makes more sense, because at least then your payments will be retiring some of the debt and not just paying interest. That's assuming, of course, that you can actually make that higher house payment without excessive difficulty.
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I have figured out a budget for getting the house into good rental condition, and I think we can do that for $17K. We are going to proceed with getting a loan from Kevin's credit union (after I get my credit unfrozen) for $100K, $19K will go toward the price above what we want to pay in cash, and then $17K to perhaps $20K will go toward renovations. Whatever we have left over we will pay back to the credit union, but they are giving us a good rate at 3.7%. Whatever we pay off will decrease the amount of time we have to pay back the loan, but not the monthly payments. One repair we will need to make ourselves is the heater for the pool/spa. I estimate this at $3K, but it will be worth it because people have already told me that they are willing to pay the $40-$50 per day charge for heating the pool when they rent in the winter. In May through October, there will be no need to heat the pool, but we need to have that option to offer. The main renovation we will do will be to change the bathtubs to walk-in showers. That's what we want for ourselves, and people have told me that they do not take baths in rental properties and prefer the walk-in showers. Anyway, to answer my original question, it looks like we are going to use my brother's credit union (from Sony) for our loan, and I will be meeting with him tomorrow at 11:00 AM with the loan officer. Tomorrow morning Kevin will do the wire transfer for the escrow from his bank on the Sony lot, and I will meet him after that.
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Billl
12 years ago
You really need to see a lawyer with help settling the estate. I find it hard to believe that your father took out a loan backed by a property he had already deeded to you. If any lender was foolish enough to do that, you may not owe them any money. Whatever you do, don't consolidate the loans until you have all the legal issues settled for the estate. Once you put loans into your name, you owe the money no matter what.
azmom
12 years ago
You also need to see a TRUSTWORTHY CPA or a financial planner to take an integrated look at your entire financial picture.

You did not provide enough details for us to determine if the numbers you listed here regarding the house related loans are accurate, let alone to recommend what approach you should take in handling this house. By listening to your son and your brother to make decisions on your finance is not a good idea. You need to educate yourself.
jakkom
12 years ago
Yes, you need to talk to an expert fiduciary. For one thing, you need to know your tax liability because you probably don't qualify for a step-up basis, should there be substantial equity in that house.

With such a specific financial question, you should never be looking for advice from amateurs or anonymous Web forums. Making a mistake can literally cost you thousands, because the only 'skin in the game' in this case, is your own.
vala55
12 years ago
I agree you need to see an estate lawyer. I don't see how he could have gotten a loan unless he failed to file the quick claim document. something is wrong here.
sandyinva
Original Author
12 years ago
Rest assured, I have been in contact with a financial planner concerning my 401 K's, emergerncy savings, etc, and continue to be so.

My brother seems to think my father was given the option of the equity loan at the time he purchased the house. I am faxing a letter and the quickdeed to the mortgage company as a third party interest, explaining why I need to know the the date of origination before I legally assume the equity loan, in the event that it did happen after quick claim deed, written 8 years ago. Once they have that information, they will divulge when the equity loan was originated.
randy427
12 years ago
I believe the term is QUIT CLAIM, as in the person is quitting, or cedeing their ownership of the property.
feedingfrenzy
12 years ago
It sounds like you think your father took out the HELOC simultaneously with the purchase mortgage at the time he bought the house, but did not access the funds available from the HELOC until after he quitclaimed the property to you.

Did you not find his closing papers on the property among his personal records after his death? That would be something most people would keep among their valuables. I assume you've gone through everything of his, but perhaps he kept them in a safty deposit box that you're not aware of?

Tracking down this HELOC may prove to be more difficult than you think because it's really not in the mortgage company's interest to help you with this. A consult with a real estate lawyer (one who specializes in real property law and not probate or decedant's estate law) at this point sounds like a good move to me.
marie_ndcal
12 years ago
I agree, you do need a estate lawyer to guide you, not your planner or any relatives. You need to protect yourself and please do not sign any papers until you get the legal advice.
feedingfrenzy
12 years ago
She may well need a probate lawyer to handle the estate if she doesn't have one already, but as I said above, she should also probably consult a lawyer who specializes in real estate (property) law to help her find out the details of the HELOC if she's unsucessful getting them from the mortgage company.

What to do inherited second home w/ mortgage and equity loan?

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sandyinva
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What to do inherited second home w/ mortgage and equity loan?

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