Second Mortgage
Second Mortgage Loans
By Gugum
A second mortgage, in the form of a home equity loan or home equity line of credit, may enable you to use your real estate equity for a variety of purposes including home improvement, college tuition, and debt consolidation. Be aware that second mortgage loans put your house at risk, so be careful and realistic when you compare loan amounts, rates, terms, and your ability to repay.
If you still owe $200,000 on your $300,000 house, and your lender uses an 80 percent loan-to-value (LTV) ratio, you could borrow up to $40,000 (80 percent of your home’s appraised value minus the $200,000 you still owe). You may need the full $40,000, but remember that it requires a 2nd mortgage payment, probably at a higher interest rate than your original mortgage, and you’ll need to pay off both mortgages when you sell your house.
Do your homework when shopping for home equity lines of credit. Terms and conditions on these flexible loans vary widely, and some do not charge an annual fee. Compare the long term interest rates, introductory rates. and rate caps on every credit line you consider.
When comparing home equity loans, consider both up-front and long-term costs. The up-front costs include points, origination fees, and closing costs. The long-term costs are the total amount of interest you can expect to pay over the life of the loan. This amount is easy to calculate with a fixed-rate loan, using a lender-provided amortization chart. With an adjustable loan, you will need to compare the points, annual percentage rates (APRs), lender fees, index rates, margins, and other terms and conditions.
If you have an adjustable-rate loan, your monthly payment amount cannot be pre-determined. As with any adjustable rate mortgage, you can expect your payments to increase when interest rates go up. If your adjustable mortgage or line of credit specifies fixed payments, it means that the additional interest is added to the end of your loan, and you’ll be expected to pay this extra money at the end of the loan term.
Before you commit to a second mortgage, compare its terms and cost with the terms for refinancing your first mortgage. Second mortgages, structured as home equity loan or credit line programs, may allow you to use your real estate equity for a variety of needs.
A second mortgage loan is one of the two types of home equity loans. The other type is a “home equity line of credit” or HELOC. A 2nd mortgage works just like your first mortgage – you have access to a set amount that you agree to pay on a set schedule.
The equity you need to take out a 2nd loan mortgage varies from state to state. How much is the interest rate? Remember that the interest rate of a 2nd mortgage will be a little higher than the interest rate you are paying for a 30-year first mortgage. However, the interest in 2nd mortgages is tax-deductible. You can use the money from a 2nd mortgage loan for home renovations
, paying off student loans or for business. Small entrepreneurs are quick to turn to 2nd mortgage loans for business development opportunities.
A second mortgage loan used to carry the stigmata of financial hardship. A second mortgage is exactly what it sounds like. In recent years, there has been fierce competition amongst lenders which has resulted in the widespread availability of low rates on all types of loans, second mortgage loans included. Still, second mortgage loan rates do tend to be slightly higher than the rates offered for a primary mortgage. It is a good idea to shop around and compare the rates offered by different lenders before applying for a second mortgage loan. Many times you will find special offers of low fee and no fee second mortgage loans which can help keep closing costs down.
Types of 2nd Mortgage Loans
There are essentially three basic types of 2nd mortgage loans. There is the traditional second mortgage loan, the home equity loan and the home equity line of credit.
2nd mortgage loans are useful to homeowners for a multitude of reasons. If you have the need to finance a home improvement project, pay off medical bills, start a business or send your kids to college you might be a perfect candidate for a 2nd mortgage loan. Second mortgage loans are also useful in some situations to avoid mortgage insurance requirements on your first mortgage.
Second mortgage loans also offer advantages over mortgage refinance loans. The amount of time and paperwork required to get a second mortgage is minimal compared to what is required for a mortgage refinance.
Because a 2nd mortgage is secured by your home, if you were to default on the loan the bank would sell your property to pay off the debt.
