Most average Americans are able to buy their own homes through a mortgage. And,
while paying off the first mortgage, other needs for money arise for important
things such educational plans for the children, cash for renovating the house,
money for capitalizing on a small business or money to pay off personal debts. A
second mortgage can even be used to pay off the first mortgage.
A second mortgage is usually based on the equity - your interest, as an owner,
on your home based on the mortgage payments you have paid and the increased
value of your home property.
Besides it being a second to the first mortgage, a second mortgage is different
from a first mortgage in terms of interest rates. A second mortgage usually has
a higher interest and is usually paid in a shorter time. Aside from this, a
single large payment called balloon payment is also made at the end of the
paying period
Usually, refinancing is an alternative for second mortgage especially when
interest rates are low because higher rates apply on second mortgages than on
the first one. On the other hand, there are other features of a second mortgage
which makes it more favorable than refinancing. This includes the looser
contract guidelines which reduces the amount of time and effort to get that
second mortgage. Apart from this, second mortgage may have lower transaction
costs that can override the higher interest and which may also, in the long run,
cost less than getting a refinancing.
Traditionally, a second mortgage has established repayment schedules and is
offered as a fixed loan. But, at present, there are three options from which you
can choose from. These are: the traditional second mortgage, a home equity loan
and home equity line of credit. We will talk about the features of each briefly
below
a. Second mortgage. This loan is ideal for situations where you need the money
in lump form especially for home improvement. Second mortgage can be found as
either fixed-rate or adjustable from 5 to 20 years but typically 15 years.
Seventy five to eighty percent of the appraised value of the home is the loan
limit for both merged loans.
In a second mortgage, interest rates are higher than that of the first mortgage
especially if this is a fixed second mortgage. Adjustable second mortgage, on
the other hand, have lower interests but have higher margins. Loans usually
closed in two to three weeks and the amount to be paid during closing is usually
two to three percent of the total loan amount. Requirements needed when applying
for a second mortgage include home appraisal and credit check.
b. Home Equity Loan. A home equity loan is like the traditional second mortgage
but is different in 2 ways. First, unlike second mortgage, this has lower
interest rates and second, lenders can waive off closing costs. Most types of
this loan being suggested are adjustable in the market.
A home equity loan is usually used for home improvements and renovations just
like a second mortgage and it can also be used to finance a business.
c. Home Equity Line of Credit. This type of loan is ideal for cases where there
is a need for funds periodically such as for debt consolidation or for payments
of college plans or tuition fees. Just like in a second mortgage, a credit check
and a home appraisal is required before you can be given this type of loan.
The loan amount is usually seventy five to eighty percent of the home's
appraised value and the interest is changeable. Some lenders waive off closing
costs but others could total up to $1,000 plus points.
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