Second mortgages - Second mortgages can be used for many different reasons. A second mortgage can be used to consolidate debt, to avoid PMI insurance on a home purchase, to pay for childrens tuitions, to provide for a vacation, and for many other reasons. Consult a mortgage professional to see what options are available to you and to find out if you qualify for a second mortgage.There are two types of Second Mortgage, Home Equity Loan and Home Equity Line of Credit (HELOC). A Home Equity Loan has a fixed interest rate for the entire loan term. A HELOC has an adjustable rate, usually base on the Prime Rate published on the Wall Street Journal.
Most people that take out a 2nd mortgage take out a loan up to, but generally not exceeding the appraised value of their home. Depending on what you needs are you may be able to take out a 2nd mortgage that actually exceeds the value of your home. While this is certainly not for everyone, it is helpful to know that the possibility exists.
Second mortgages are a useful way of obtaining 100% financing when a making a large down payment is not an option. Combo loans (often referred to as 80/20s or piggyback loans) allow the buyer obtain two mortgages: one for 80% of the loan amount, and a second mortgage covering the remaining loan amount. Expect rates on the second mortgage to be a few percent higher than the interest rate on the first mortgage. This option is also popular because it allows a larger tax deduction and requires no private mortgage insurance.
Second Mortgage Loans - Your current financial situation and needs will help determine which type of second mortgage is right for you. There are currently two types of second mortgages available, fixed rate and adjustable equity lines of credit.
Some home equity lines require an initial withdrawal at closing. That amount varies from lender to lender. Also, be aware that you may be charged a yearly service fee by most lenders.
A second mortgage is a common tool for purchasing a home. Rather than make a large down payment, some people choose to take a second mortgage at the same time they take their first mortgage. This is often referred to as a combination loan and is very popular with home buyers with little or no cash on hand.
Many homeowners apply for a HELOC even if they currently do not need it to lock in the purchasing power their home equity has built up, in case there should be a decline in home value. If a homeowner obtains a Home Equity Line of Credit equaling 100% of the current home value, he would have access to 100% of the current equity built in the home, even if home values decline in the near future.
A HELOC, also know as an Equity Line of Credit or Home Equity Line of Credit, is a credit line using the property as collateral. The line of credit allows the property owner to draw and pay only on the withdrawn money.
Most HELOCS carry adjustable rates that will fluctuate with prime, although there are some types of HELOCS that will allow you to convert your balance to a fixed rate for the life of the loan. This will however only apply to existing balances, and any new charges will be variable until you contact the lender to execute a fixed rate conversion.
A fixed rate loan offers a reasonable amount of security against any interest rate increases, but it is a one time loan. If you wanted to pay it off and use it again in the future you would need to go through the approval process again.
Fixed Rate Second Mortgages - A fixed rate second mortgage is a second lien on your property that is obtained by utilizing the equity available in your home. With a fixed rate 2nd mortgage you will receive the entire loan amount up front and make payments for the specific term of the loan (such as 10 years, 15 years, etc...). The rate on these loan types is fixed.
A fixed rate second mortgage is different from a home equity line of credit because with a home equity line of credit you have a revolving credit limit and with the fixed 2nd you don't. A revolving credit limit is basically the same as a credit card: you have a maximum credit limit and as you pay it down the money becomes available again. With a fixed rate 2nd mortgage you do not have the money available to you again after you pay the loan down or pay the loan off.
The mortgage interest is generally deductible on a fixed rate second mortgage just as it is on a 1st mortgage and also a home equity line of credit. A fixed rate second mortgage is a good idea for people trying to consolidate debt and for people who are looking to do a home improvement loan.
A fixed rate second mortgage is utilized very often when someone buys a house with little or no down payment. A borrower may do an 80/20 loan or an 80/15 loan. The 80/20 is a 80% first mortgage and a 20% 2nd mortgage and an 80/15 loan is a 80% first mortgage and a 15% second motgage with the other 5% coming in the form of a down payment from the borrower. The second mortgage in these 2 transactions listed above can also be an equity line of credit but most equity lines are adjustable rates and many borrowers like to have the luxury of a fixed rate and knowing that their payment will not increase and they will have the loan paid off in x amount of years.
You may be entitled to a lower rate if you choose a fixed rate second mortgage with a balloon feature. The loan may be a fixed rate and amortized over 30 years but the note will be due in 5, 10 or 15 years.
Although borrowers always enjoy the comfort and security of a fixed rate it is important to remember than second mortgages are usually not kept for the long term. Because they are normally at a substantially higher rate than a first mortgage, most homeowners end up refinancing them into their first mortgage.
Where the short term rate is in a rising environment, some people prefer the security Fixed Rate Seconds offer over the risky nature of adjustable rates of Home Equity Line of Credit (HELOC). Take for example in late 2005 and early 2006, when the Prime Rate (a short term rate index which most HELOC’s are based on) was only about 0.5% lower than the interest rates of Fixed Rate Seconds. With such a small difference between the Fixed and the Prime, most homeowners opt for the peace of mind that Fixed Seconds offer.
