 In a hurry to get a second mortgage
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 Dear
Dr. Don,
I have two friends giving me conflicting advice about a home equity
loan -- and both of them are real estate agents! One told me that
with my high credit score, if I buy a house and make on-time payments
for four or five months, I can easily take out an equity loan and
it doesn't matter whether my home's value goes up or down. The other
said I need to wait for the house to go up 20 percent in value in
order to take out money. Which one is correct?
Thanks a lot,
-- Quan Quixote
 Dear Quan,
A home equity line of credit or a home equity loan is a second mortgage,
if there is an outstanding first mortgage. That means that the first
mortgage lender has a priority claim on the property if you don't
make the loan payments, and the home equity lender's claim on the
property comes second.
Your equity in the property is the difference between the property's appraised value and the outstanding mortgage loan balance(s) secured by the property. When buying a home, in general, your equity in the property is the down payment. You can turn around and borrow against that down payment with a home equity loan without the home appreciating in value. An on-time payment history and an excellent credit score helps to get the loan approved, along with an income sufficient to cover the payments.
Once the mortgage loan closes, any downward movement in your home's value increases the risk position of the home equity lender. Because of that risk, the home equity lender isn't likely to let you tap 100 percent of the equity you have in your home, at least not at a competitive interest rate. That's why your other friend is suggesting you need to see some appreciation in the home's value to take out a home equity loan.
You don't have to wait for your home to appreciate in value by 20 percent to take out a home equity loan. Waiting for some appreciation can make it easier for a lender to approve the loan at a competitive interest rate, but appreciation isn't necessary to tap your equity.
If you are going to the closing of your first mortgage anxious for the day when you can close on a second mortgage and take back your down payment, it's likely you are either buying too much house or have chosen the wrong approach to financing that home purchase.
To ask a question of Dr. Don, go to the "Ask
the Experts" page, and select one of these topics: "Financing
a home," "Saving & investing" or "money."
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