If you need to borrow money, a second mortgage may be a useful source of needed funds. A second mortgage is simply another mortgage on your home, a loan secured against the property. The term “second” indicates that the loan does not have priority on your home in case you default. Instead, your first mortgage has priority and would be paid before any funds go towards the second mortgage. Although several second mortgages are available, the most common types are the home equity installment loan and the home equity line of credit, commonly called a HELOC. Either type may provide tax advantages. Seconds allow you the flexibility to take money and turn it into more money for yourself. For example, you can use the money to reinvest into your home (and increase its value even more) or to make other investments.
Deciding which loan is best for you depends on whether you need a set amount of funds in one lump sum (home equity installment loan) or a flexible amount over time (HELOC). The home equity installment second means you must take all of the money upfront. They usually have a fixed interest rate. With the HELOC loan, the money can be withdrawn in a series of advances made available by writing checks on the account. It’s like a giant credit card. With the installment loan, you will be required to make scheduled monthly payments, which will include principal and interest. With most HELOC’s, however, you are only required to pay monthly interest payments on the borrowed amount. This means your monthly payments will not reduce the principal amount owed on the loan. You can always pay additional funds toward the principle, which will lower the monthly interest payment and of course, the payments. After a period of years, usually between 5 and 15, you will be required to pay off the balance on a scheduled basis and at a fixed rate. Some home purchasers take out seconds to avoid paying mortgage insurance on the first mortgage.
A second mortgage loan may be easier to get than an unsecured personal loan because you are putting up your home’s equity as collateral. This gives the lender reassurance that if you default, they will have something to fall back on.
Home equity is often the largest asset a homeowner has. Financial success depends on knowing how to use it wisely. As always, if you need help or advice, just respond to this email.
