A second mortgage can sometimes be a good option when you need money.? Second mortgages are more commonly selected by consumers who are in need of funds for larger home improvement projects or wish to consolidate their monthly debts.? The information provided here is give you an overview of second mortgages, how they are used, and pros and cons that should be considered prior to getting one in today?s economy.
What is Second Mortgages?
If you?re considering a second mortgage, you obviously know how a first mortgage works because you already have one.? A second mortgage is a second lien placed on the home for a loan based on the remaining equity in your home after the 1st mortgage balance is deducted.? Lenders often set limits of what percentage a borrower may qualify for in terms of a loan amount.? For Example:? If your home is worth 200K and you owe 125K on your first mortgage, this leaves 75K in equity.? All lenders offer different loan limits for second mortgages.? If the lender offers a 90% 2nd mortgage, then what they are saying is they will loan 90% of your homes appraised value LESS the amount of your first mortgage (200,000 x 90% = 180K minus 125K (first mortgage) = 55k second loan.? Most lenders require a higher rate on a second mortgage because they are in 2nd position to be paid should the borrower default.? When a homeowner has both a 1st and 2nd mortgage on their home, and defaults on their mortgage, the first mortgage holder always gets priority of being paid first.? So, because a second mortgage carries more risk for the lender, the rate will usually be higher, and so will the fees associated with these mortgages.? Sometimes second mortgages are referred to as Home Equity Lines of Credit (HELOC?s) or Lines of Credit.
How to Use a Second Mortgage
When needing a minimal amount of funds for debts or home projects, it?s not advisable to take out a 2nd home mortgage.? More common reasons to get second mortgages would be for major home improvements; consolidating large amounts of debt (that will make a difference in your overall monthly outgo); or investing in an additional home.? Creating a home equity line of credit gives some homeowners peace of mind for emergencies that could come up, and only using it when they need to.? This isn?t a bad way to give yourself some added security ?if? you?re disciplined enough to avoid withdrawing the funds for miscellaneous purchases just because it?s there.
Pros and Cons
Sometimes second mortgages are the only good solution when you need a substantial amount of money, and are clearly the right choice.? The 2nd mortgage rates are usually higher, but they are still normally lower than if you were to use a credit card. However, make sure you are comfortable with the mortgage payment and will not have trouble making it.? A 2nd mortgage holder can take foreclosure actions even if you are paying your first mortgage on time; reason being, they too have a mortgage lien on the home.
Types of Second Mortgage Loans
Getting a second mortgage is a big decision for most homeowners.? When placing a 2nd mortgage on your home, it?s important to know what options and loan programs are available so you can make an intelligent decision on what will work best for you. Ensuring you can afford the payment and knowing what loans are available are two key elements.? Calculating the payment is easy, you can use the mortgage calculator right here on our site, and it?s free.
HELOC ? Home Equity Line of Credit
This type of loan is in the form of revolving credit in which your home serves as collateral, just like your first mortgage.? Lenders will approve a credit line based on the equity in your home.? Not all lenders offer the same percentage they will lend on a HELOC, some may offer up to 75% of the home value while others offer 100%.? The amount of the loan is calculated by value; For example:? If your homes appraised value is 100K and the HELOC is offering 85%, this means they will lend a line of credit for 85K less what you owe on your first mortgage.? If you owe 50K on your first mortgage, the total available to you will be 35K in the form of a home equity line of credit. These loans commonly have ?draw? periods in which the borrower can withdraw funds from the line of credit, at the end of this draw period you may be allowed to renew the credit line.? Once approved, borrowers can usually borrower up to the credit limit whenever they want; usually by using special checks to draw on the credit line, and some plans use credit cards or other methods to access the funds.? HELOC?s typically involve variable mortgage rates rather than a fixed interest rate.? Some lenders do allow you to convert from the variable rate to a fixed rate during the life of the credit plan (or let you convert all or a portion of your line to a fixed-term installment loan).? There are a tremendous amount of options associated with HELOC?s that will vary from lender to lender, make sure you read the loan agreement and ask questions if there is anything you do not understand.
Traditional Second Mortgage
With this mortgage loan, a lien is placed on the home, just like a first mortgage.? The lien placed on the home is a 2nd position lien (meaning if the loan goes into default, the first mortgage gets paid off before the 2nd mortgage).? However, a second lien holder can foreclose on the property if a homeowner stops making payments, even if the homeowner is making payments to the first lien holder or there is no equity in the home.? Terms for a traditional second mortgage can be up to 30 years, and the rate on the loan is usually a fixed rate.? Unlike a HELOC, funds from a traditional second mortgage are paid in one lump sum, and the loan is for a fixed period of time (just like a first mortgage).
Home Equity Loans
Home equity loans have characteristics of both HELOC?s and traditional second mortgages; they come in two types: closed end and open end, funds are disbursed in lump sum or in increments.? Rates can be fixed or variable, depending on the lenders programs.
Second Mortgages or Home Equity Line, Which Should You Choose?
Unfortunately many consumers don?t understand the difference between a second mortgages and a home equity line of credit, or a HELOC.
A second mortgages is much like a first mortgage in the fact that is can have either a fixed rate or an adjustable rate. It is important to understand which type of rate your second mortgages will have. It is good to know that the adjustments have a limit as to how high they can adjust but also have a floor limit of how low they can adjust.
This helps consumers know what their worst case scenario payment would be, so be sure to calculate the highest possible payment you could end up with so you are not surprised later on. These second mortgages also have terms, which is the number of years that the loan will be amortized over and you will be making payments for. Just like first mortgages, a second mortgages also has various terms available depending on the programs and payments your financial situation allow you to qualify for.
HELOCS, are an open line of credit secured by your property with an approved credit line. The lender will qualify you for a predetermined amount and you will have the ability to access credit in that amount. One of the most important things you need to know as a consumer is that you might get a lower ?rate? for a HELOC but the interest is compounded just like a credit card, which means it could take you just as long as a second mortgages, if not longer to pay if off if you only send in the minimum monthly payments.
When deciding whether to get a second mortgages or a HELOC, compare the programs you qualify and you can then weigh the benefits of each one so you can make the best decision.
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