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Check your second
Published on 03/27/08 10:08AM by olivier kozlowskiWhen you bought your house, did you get an “80/20” deal? You know, a 1st and 2nd mortgage at the same time to avoid having to pay PMI or putting too much down. Have you taken out a home equity line since you bought your home?
If you answered “yes” to either of those questions, you’re not alone. It’s estimated that Americans owe $1.1 TRILLION in second mortgage debt alone. If you answered “yes,” do you know what the terms of your home equity line really are? Lenders have offered many different kinds of deals on home equity lines over the past few years. So dust off that closing packet copy you have in a drawer somewhere and read on.
First, check to see what your “draw period” is vs. your “repayment period.” Many home equity lines give you a 10-year “draw period,” which means you can draw against it, pay it back, draw again and so on. But the “repayment period” can vary greatly. You might have a 20-year repayment period, which means that whatever your balance is at the end of your “draw period,” you have the next 20 years to pay that back. Some repayment periods, however, can be as short as 5 years.
Next, see whether you’re paying interest only during your “draw period.” This may be a bit tougher to do, because sometimes lenders offer you an option on your monthly statements to pay a “minimum” amount, which might be interest only, or something more, which would actually start paying down your principal. Keeping with the example we used earlier, if you’ve maxed out that $100,000 line over 10 years, paying the minimum payment each month, and you are unfortunate enough to have a 5 year repayment period, you basically have a 5 year mortgage of $100,000. You don’t want to know what the payments on that will be.
There are other potential pitfalls with equity lines these days if you’re trying to refinance your first mortgage or sell your home. We’ll discuss these in the next blog entry on this subject. In the meantime, go “check your second,” and if you’d like to have one of our attorneys assist you in determining your mortgage situation, contact us at olivier@bierlaw.com.