Home Equity Loans

Introduction to Second Mortgages

Many individuals who have a home consider it to be their most valuable asset. This means that individuals often want to be able to take the equity that they have built in their home and use it. However, few individuals completely understand how to take he equity from their home and use it for any use imaginable.

Why Use a 2nd Mortgage

Homeowners often used a second mortgage in order to be able to withdraw equity from their home. While more consumers may be familiar with a HELOC or home equity line of credit, a second mortgage is another term for this type of loan. Borrowers who have a first mortgage on their home typically are able to match their first mortgage with a new mortgage to 85% of the value of the home. However, many states have lenders who allow borrowers to take up to 125% of their home value through a new mortgage.

Common Reasons to Use a 2nd Mortgage

Many borrowers use a 2nd mortgage when they have a large amount of debt to pay off, wish to make an investment or start a new business, want to avoid paying private mortgage insurance, wish to remodel, renovate, expand or otherwise alter their home.

What Rates Do I Qualify For?

The rate that an individual borrower may qualify varies from lender to lender as well as borrower to borrower. However, borrowers should expect rates to be higher than they would be on a traditional first mortgage. This is due to an increase risk of default for the lender. Borrowers who default on their home mortgage will be required to pay the first loan and then the second loan. This leaves most lenders without any recourse against the borrower. Borrowers with excellent credit ratings may qualify for a lower interest rate on their 2nd mortgage. There are both fixed and variable home equity lines of credit available for individuals who are interested. The rates vary based upon the loan to value ration as well as other factors that vary based upon the individual borrower/lender relationship at the time of the quote.

Common Problems Borrowers Face With a Second Mortgage

Some borrowers are going to face issues when applying for a second mortgage. However, there are a number of frequent problems that can be avoided simply by understanding how these types of mortgages work. First, any mortgage holder who plans to refinance should tell the refinancing company that they wish to keep their second mortgage as a junior loan. This helps to ensure that individuals have the lowest possible rate on their first mortgage and a slightly higher rate on their second mortgage. A second mortgage may have a pre payment penalty. This is a penalty that mortgage holders will have to pay should they decide to pay ahead on their second mortgage. Borrowers may regret using a second mortgage to pay down their credit card debt as well. The payment on the second loan may be at a lower interest rate but the credit card debt could be extremely high if individuals continue to spend. Consumers need to pay special attention to second mortgage rates if they do not have a fixed mortgage. Rates that are increasing or decreasing could warrant special attention from a consumer that has a variable second mortgage to ensure that they have the best second mortgage rates.

Conclusion

A second mortgage is often a great option for homeowners to utilize. The equity that many homeowners have built into their homes allows them to renovate their homes, send their children to college and pay down high interest debt. However, homeowners need to completely understand a second mortgage before going out and pursuing a second mortgage!