The Truth About Second Mortgages
A second mortgage is a loan option that home owners can look into if they find themselves suddenly in need of a large amount of cash. Second mortgages allow home owners to access the equity of their home (which is usually the difference between the balance of the original mortgage and the current value of the home). Mortgage lenders commonly allow home owners interested to take a second mortgage to borrow up to 80% of the home's equity.
Thanks to the strong housing market in the U.S., more and more buyers are confident with taking a second mortgage. And with median home prices rising steadily by nearly 5% annually, can you actually blame the home owners for considering this "free cash" option? If you would like to use a second mortgage to give your wallet and bank account a boost, here are some second mortgage facts you should know:
1. Flexibility on usage of cash- the money received from a second mortgage can be used by the home owner in any way they please. Mortgage lenders are more concerned about your ability to pay off your debt on time than on where you plan to spend the money.
Tip: Instead of using the money to splurge on a shopping spree or a list of must-haves, it might be a good idea to use the cash to improve your home and work on that renovation plan you had in mind.
2. Two types of second mortgages- The two types of second mortgages are the home equity loan and HELOC (Home Equity Line of Credit). A home equity loan provides you with cash upfront and you pay monthly installments to settle your second loan. Home equity loans have fixed interest rates. HELOC, on the other hand, have flexible interest rates (which oculd increase when market indices rise). HELOC does not give you cash upfront, but you have full access to the full loan amount through a credit line. You only pay interest on the cash that you borrowed. It's basically a giant credit card in the form of your home.
3. Higher fees and interest rates- Applying for a second mortgage is similar to applying for a regular loan; lenders will check to see if you meet certain credit and income requirements. Take note, however, that second mortgage interest rates and fees are highe because second mortgages are deemed to present the lender with more risk.