Second mortgage?

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toolfan
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Second mortgage?

Postby toolfan » Thu Jul 01, 2010 12:24 pm

Had a thought the other day: take a second mortgage of about 100k on a house worth approx 350k. The first mortgage is almost paid off (20k remaining), and I'm sure the interest rate would generally be lower than those of student loans. Has anyone personally financed their education like this? I know parents do it for there kids for UG, but what about doing it for yourself?

To be honest, I'd rather pay 400/mo on a 30 yr mortgage opposed to the fed's 1.5k/mo. when beginning my post-law school life (I don't expect biglaw). No, I don't want to pay that for 30 years. But, I could always double up, if not triple, the payments when my salary allows me too.

I not very financially savvy. It probably isn't this simple. If anyone could chime in, I'd appreciate it.

Edit: I will be able to make the monthly payments on this throughout school.

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fl0w
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Re: Second mortgage?

Postby fl0w » Thu Jul 01, 2010 12:28 pm

toolfan wrote:Had a thought the other day: take a second mortgage of about 100k on a house worth approx 350k. The first mortgage is almost paid off (20k remaining), and I'm sure the interest rate would generally be lower than those of student loans. Has anyone personally financed their education like this? I know parents do it for there kids for UG, but what about doing it for yourself?

To be honest, I'd rather pay 400/mo on a 30 yr mortgage opposed to the fed's 1.5k/mo. when beginning my post-law school life (I don't expect biglaw). No, I don't want to pay that for 30 years. But, I could always double up, if not triple, the payments when my salary allows me too.

I not very financially savvy. It probably isn't this simple. If anyone could chime in, I'd appreciate it.

Edit: I will be able to make the monthly payments on this throughout school.


Read a book called "The Big Short". Shouldn't take too long to get through it; I just read it. It explains our most recent financial crisis and one point touched on is how a lot of people have gotten trapped by second mortgages because of deceptive teaser rates, etc. If you don't do it right, you get GOUGED. It is possible to do this successfully, you just have to make sure you do it the right way. With how much equity you have in your home, it sounds like you are off to a good start on not getting ROYALLY boned.

toolfan
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Joined: Fri Oct 30, 2009 4:11 pm

Re: Second mortgage?

Postby toolfan » Thu Jul 01, 2010 12:38 pm

fl0w wrote:
toolfan wrote:Had a thought the other day: take a second mortgage of about 100k on a house worth approx 350k. The first mortgage is almost paid off (20k remaining), and I'm sure the interest rate would generally be lower than those of student loans. Has anyone personally financed their education like this? I know parents do it for there kids for UG, but what about doing it for yourself?

To be honest, I'd rather pay 400/mo on a 30 yr mortgage opposed to the fed's 1.5k/mo. when beginning my post-law school life (I don't expect biglaw). No, I don't want to pay that for 30 years. But, I could always double up, if not triple, the payments when my salary allows me too.

I not very financially savvy. It probably isn't this simple. If anyone could chime in, I'd appreciate it.

Edit: I will be able to make the monthly payments on this throughout school.


Read a book called "The Big Short". Shouldn't take too long to get through it; I just read it. It explains our most recent financial crisis and one point touched on is how a lot of people have gotten trapped by second mortgages because of deceptive teaser rates, etc. If you don't do it right, you get GOUGED. It is possible to do this successfully, you just have to make sure you do it the right way. With how much equity you have in your home, it sounds like you are off to a good start on not getting ROYALLY boned.


Teaser rates? Sounds fun. Thanks for the heads up. I'll def. check out the book.

Still, has anyone first hand experience here?

toolfan
Posts: 151
Joined: Fri Oct 30, 2009 4:11 pm

Re: Second mortgage?

Postby toolfan » Thu Jul 01, 2010 3:26 pm

bump.
would really like to hear some anecdotes.

03121202698008
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Re: Second mortgage?

Postby 03121202698008 » Thu Jul 01, 2010 3:46 pm

If you do this, your loans would not be eligible for IBR, LRAP, tuition reimbursement (if offered by your future employer) or deferment should you lose your job. Just a thought.

Also, for a second mortgage, you may or may not get that low of a rate. You'd probably have to refi the whole thing and take out the money. The interest would still be tax deductible assuming you live in this house, if you moved you would no longer be able to take the deduction.

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fl0w
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Re: Second mortgage?

Postby fl0w » Thu Jul 01, 2010 3:52 pm

also think about the cost of doing this. There are up front costs associated with a second mortgage that do not exist for taking out student loans. Additionally, but honest about the difference in interest rates and beware of teaser rates (something that is fixed for 2-5 years, then is variable).

The reason student loan monthly payments are typically SO much higher is because you pay them over over a much shorter term than a 30 year mortgage. But you can choose a longer term for your student loans after consolidating them. Plus you get all the options that blowhard mentioned about IBR, LRAP, deferment, etc.

Wort case scenario, you end up in a situation of extreme hardship. You cannot stop paying your mortgage, but you can defer payments on student loans. maybe it's a difference of 5% for mortgage vs. 6% for student loans? I forget what grad school loan percentage rate is right now.

I'd much rather own my home in the clear, personally, and be paying student loans than have no educational debt but owe a large chunk on my house.

TaxLaw2010
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Re: Second mortgage?

Postby TaxLaw2010 » Fri Jul 02, 2010 11:18 pm

Ok, I'm about to play devil's advocate here for a second. On the one hand, taking out a second mortgage to pay for school will provide you with some decent options if you don't plan on big law or you don't land a job and find yourself in financial hardship. For starters, the loan is backed by your house and therefore does not adhere to the rules associated with federal loans. Therefore, if the need arises, you could file bankruptcy to dissolve the debt completely, provided you don't want to continue living in your home, and have your law school education paid for without owing one red cent if the job market does not pan out. You can't do that with student loans. If you wanted to stay in your home, you could still file bankruptcy and keep the home, because of homestead rights. Each state provides that debtors in the state are entitled to a "homestead exemption." A homestead exemption allows a debtor to protect equity in a homestead up to certain limits. Thus, if the equity in your homestead property is less than the exemption provided under state law, your house can be protected from creditors and you can file for Chapter 7 bankruptcy without having to sell your house to pay creditors. So again, you would be able to keep your home if you wanted, have your law school education paid for, and walk away from law school debt free should financial troubles arise.

Now, on the flip side, student loans are easier to obtain, because there are very few credit requirements for Grad Plus, and no credit requirement for Stafford Loans. The IBR and PSLF programs are great for borrowers who plan to go into lower paying, public service jobs, and when combined with LRAP programs, you could possibly walk away from law school and after 10 years of public service work, be student loan debt free without ever having paid a dime in student loan payments. Many LRAP programs only apply to federal student loans, so if you took out a second mortgage to pay for law school, you would not be able to participate in an LRAP program, and barring either of the above mentioned scenarios, you would be looking at repaying the entire cost of law school with little or no help from the IBR, PSLF, or LRAP programs that are available to provide assistance for public service workers.

I personally, would NEVER put my house on the line for law school (and I am a former banking professional, who has underwritten many loans). The reason why, is because education loans are virtually unsecured loans that are relatively inexpensive, especially if you never plan to go into big law. Why collateralize your law school education when you don't have to? Do you think the bank will care that you can't get a job after law school if your loan is secured by your house? Absolutely NOT!!! They will foreclose on the house if you can't pay the second mortgage. Whereas, with student loans, if you can't get a job after law school, there are forbearance options, deferment options, etc. At the end of the day, it is up to you, but a second mortgage to go to law school in this economy is not necessarily a wise decision, when you could accomplish the same goal by taking out student loans and preserving the equity in your home for something else. Also, keep in mind that if you plan to go to law school full time, and not work, you may be pretty hard pressed to find a bank that will give you a second mortgage without a job in this economy.

Just my two cents. Sorry to write a book.

toolfan
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Re: Second mortgage?

Postby toolfan » Sat Jul 03, 2010 9:43 am

Really appreciate the input folks. Definitely have some things to consider, thanks.

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TheTopBloke
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Re: Second mortgage?

Postby TheTopBloke » Sat Jul 03, 2010 9:46 am

To answer your question; NO, are you out of your fucking mind???

rando
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Re: Second mortgage?

Postby rando » Sat Jul 03, 2010 9:53 am

fl0w wrote:
toolfan wrote:Had a thought the other day: take a second mortgage of about 100k on a house worth approx 350k. The first mortgage is almost paid off (20k remaining), and I'm sure the interest rate would generally be lower than those of student loans. Has anyone personally financed their education like this? I know parents do it for there kids for UG, but what about doing it for yourself?

To be honest, I'd rather pay 400/mo on a 30 yr mortgage opposed to the fed's 1.5k/mo. when beginning my post-law school life (I don't expect biglaw). No, I don't want to pay that for 30 years. But, I could always double up, if not triple, the payments when my salary allows me too.

I not very financially savvy. It probably isn't this simple. If anyone could chime in, I'd appreciate it.

Edit: I will be able to make the monthly payments on this throughout school.


Read a book called "The Big Short". Shouldn't take too long to get through it; I just read it. It explains our most recent financial crisis and one point touched on is how a lot of people have gotten trapped by second mortgages because of deceptive teaser rates, etc. If you don't do it right, you get GOUGED. It is possible to do this successfully, you just have to make sure you do it the right way. With how much equity you have in your home, it sounds like you are off to a good start on not getting ROYALLY boned.


The teaser and variable rate issues as they affected the financial crisis didn't really have to do with second mortgages.

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RUQRU
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Re: Second mortgage?

Postby RUQRU » Sun Jul 04, 2010 7:29 am

Lending Expo says:
A second mortgage can be a bad idea for a variety of reasons. The main reason is if you cannot pay off the second mortgage, you will lose your home. Interest rates may also vary during the course of the second mortgage, causing payments to increase. If your budget is already tight, an increased mortgage payment may prove impossible to pay. A second mortgage should never be used for additional money if you have lost your job. The payments must still be made on time, regardless of your current cash flow. Another problem many people have with second mortgages is the temptation to spend once debt is paid off by the second mortgage. This creates new debt in addition to the second mortgage.


http://www.lendingexpo.net/wp/is-a-second-mortgage-a-bad-idea/

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schmohawk
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Re: Second mortgage?

Postby schmohawk » Wed Jul 07, 2010 11:52 pm

TaxLaw2010 wrote:Also, keep in mind that if you plan to go to law school full time, and not work, you may be pretty hard pressed to find a bank that will give you a second mortgage without a job in this economy.


I agree with everything this guy said, but had to reemphasize this point. When I first read this post, this was the first thing that came to mind. Before 2008, you might have been able to pull off getting this kind of deal done. But now, fortunately, most of the bad apples are gone from the market and so you just have good 'ol, meat 'n potatoes loan apps where cash is king. As a law student, you don't have cash, i.e. income. As a former underwriter myself, I'd send this back with a big fat NO.

For the love of God, don't jeopardize the largest asset you likely have at this point.

toolfan
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Joined: Fri Oct 30, 2009 4:11 pm

Re: Second mortgage?

Postby toolfan » Thu Jul 08, 2010 8:20 pm

I'm not necessarily concerned about it getting rejected. My spouse is a nurse and pulls down a decent salary, and i have a savings account and day-trading to make monthly payments. I am not sold on the second mortgage idea. I just posed this question to obtain some more info. before I consult a financial adviser.

bdubs
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Re: Second mortgage?

Postby bdubs » Wed Aug 04, 2010 12:13 am

TaxLaw2010 wrote:Therefore, if the need arises, you could file bankruptcy to dissolve the debt completely, provided you don't want to continue living in your home, and have your law school education paid for without owing one red cent if the job market does not pan out.

The reason why, is because education loans are virtually unsecured loans that are relatively inexpensive, especially if you never plan to go into big law... Whereas, with student loans, if you can't get a job after law school, there are forbearance options, deferment options, etc. .


OP: This poster didn't read your original post very closely or doesn't know what he is talking about.

The likelihood of needing to file for bankruptcy when taking out a mortgage that is ~33% LTV is remote, so I wouldn't worry about it. Worst case you move out and rent it to pay the mortgage or you just sell the place outright. Don't take out federal loans because they are "unsecured" because they are not like unsecured debt which can be discharged under bankruptcy.

You may want to consider taking out the maximum amount of subsidized stafford loans ($8,500/yr) where the government will pick up the interest tab for the time that you are in school. Once out of school you will have a better sense of employment prospects and can decide whether to repay, refinance through a mortgage or use the IBR option.

Once you start needing to take out unsubsidized loans you need to perform an adjusted APR calculation on a second mortgage relative your options for student loans. I am guessing that the mortgage may be the better option financially (specifically because its secured by an asset), but I don't know what kind of rates lenders are offering students these days.

toolfan
Posts: 151
Joined: Fri Oct 30, 2009 4:11 pm

Re: Second mortgage?

Postby toolfan » Wed Aug 04, 2010 5:00 pm

bdubs wrote:
TaxLaw2010 wrote:Therefore, if the need arises, you could file bankruptcy to dissolve the debt completely, provided you don't want to continue living in your home, and have your law school education paid for without owing one red cent if the job market does not pan out.

The reason why, is because education loans are virtually unsecured loans that are relatively inexpensive, especially if you never plan to go into big law... Whereas, with student loans, if you can't get a job after law school, there are forbearance options, deferment options, etc. .


OP: This poster didn't read your original post very closely or doesn't know what he is talking about.

The likelihood of needing to file for bankruptcy when taking out a mortgage that is ~33% LTV is remote, so I wouldn't worry about it. Worst case you move out and rent it to pay the mortgage or you just sell the place outright. Don't take out federal loans because they are "unsecured" because they are not like unsecured debt which can be discharged under bankruptcy.

You may want to consider taking out the maximum amount of subsidized stafford loans ($8,500/yr) where the government will pick up the interest tab for the time that you are in school. Once out of school you will have a better sense of employment prospects and can decide whether to repay, refinance through a mortgage or use the IBR option.

Once you start needing to take out unsubsidized loans you need to perform an adjusted APR calculation on a second mortgage relative your options for student loans. I am guessing that the mortgage may be the better option financially (specifically because its secured by an asset), but I don't know what kind of rates lenders are offering students these days.


Good advice - it virtually echoes my plan of attack.




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