Understanding Second Mortgages and Home Equity Loans
There are many benefits to buying a house rather than renting. Many people would argue that renting a property essentially creates ‘dead money’, in that the money for all intents and purposes vanishes into thin air.
Contrary to this, those who choose to buy their own home – if all goes well – will see a gradual increase in their property’s equity over a number of years, as a result of them paying their mortgage off month by month. In some cases, the equity can rise rather rapidly if a number of factors combine forces.
If a homeowner is shrewd with their money and pays off more than they are obliged too, then not only does the mortgage decrease, but the amount they are paying on interest should decrease too, assuming interest rates don’t increase. Additionally, if an area experiences an unexpected boom, perhaps due to unforeseen development work in the neighbourhood, then this can see local house prices go through the roof, so to speak.
When both the above factors occur in tandem, then the equity in a home can rise considerably in a relatively short period of time, meaning homeowners can often be sitting on mini goldmines.
Many people choose to unlock the equity in their home rather than opting to profit immediately through selling it on. The most convenient way of doing this is by going down the home remortgage route. The funds raised from this can then be reinvested back into the home, with a new conservatory, patio, garage or kitchen serving to increase the value of the home even more.
Of course, any funds acquired through taking out a second mortgage don’t necessarily have to be invested back in the home – they can be used to buy a new car, consolidate existing loans or even go on holiday. Second mortgages may have a fixed or variable rate of interest and will normally constitute borrowing a lump sum amount. As with a first mortgage, it will need to be paid back over a pre-established period of time.
One alternative to taking out a second mortgage would be to opt for a home equity loan (HEL) instead. Similar to a second mortgage, the funds are secured against the value of the property. However, a home equity loan is perhaps more similar to a credit card in that an approved line of credit is given up to a certain amount of money. Furthermore, it may even come with a credit card so that money can be spent against the credit.
Which option is best really depends on the circumstances. For a remodel or a renovation, then a second mortgage may be the best choice, as it’s easier to have an idea of exactly how much money will be needed. In situations where the actual amount of money required isn’t clear, then a home equity loan may be the answer.
By: Adam Singleton
The Second Mortgage Home Equity Loan
A second mortgage can also be referred to as a home equity loan. It is in essence a secured loan that is second, or subordinate, to the first mortgage against the property. The key issue for anyone getting this type of loan is the amount of equity they have in their home. This will ultimately determine the amount of money that can be secured for the home owners use.
Equity is the amount of money that is paid down on the home, or it can be the value of the home minus any loans owed on the home. The main reason for taking out a second mortgage is to take equity from your home and turn it into cash in pocket. What this means is that if you have enough equity in your home you can borrow money using your home as collateral. There are three basic types of loans to choose from: the traditional second mortgage, a home equity loan, or a home equity line of credit.
A second mortgage should not be confused with a mortgage refinance or re-mortgage. When you refinance your first mortgage you are replacing your old loan with a new loan, usually at a better interest rate. A second mortgage, or home equity loan, is another loan in addition to the primary loan, which will result in two monthly payments. It is important to distinguish the two to make sure that two payments will not seriously affect your monthly budget.
The interest paid on a second mortgage, up to the first $100,000 borrowed, is tax deductible provided that the loan is on your primary residence. It should be noted that interest rates on home equity loans are generally higher than a first mortgage, usually in the 2-4% higher range. But the interest rate on a this type of secured loan will be lower then on an unsecured loan, such as a car loan, and much, much lower then you will find on a credit card.
The common reasons to get a home equity loan are to pay off high interest credit cards or other higher interest rate debts, refurbishing the home, urgent family matters such as education, medical, etc. This is called debt consolidation and refinancing and is a good way to tap the asset value of your home to meet your investment and budget needs, and helps you avoid incurring high interest unsecured debt like credit cards. If you have extensive credit card debt, and are not making progress in paying it off on a monthly schedule, a second mortgage may be a good move.
There are a couple of things that anyone getting a home equity second mortgage should be aware of. A second mortgage puts a second charge on your home, meaning that the second mortgage provider can take a share of any proceeds if your home has to be sold. What is worse, if you pay the first mortgage but fail to pay the second, that mortgage provider can seize your home, even if the sum involved is relatively small.
Getting a second mortgage home equity loan can be a good way to use the equity in your home to do any number of things. Like all financial decisions using a second home loan should be carefully considered in all aspects. If it makes sense and fits within the monthly budget then it is something to be strongly considered.
By: Andrew Bicknell
What to Know About a Second Mortgage
Second mortgages and home loans are among the most popular ways for homeowners to get extra cash for important life events. Also known as home equity loans, second mortgages allow you to borrow money “against the equity in your home”. The concept sounds simple enough, but there are things that you should understand about second mortgages before you agree to take one out.
A second mortgage uses your home as collateral.
Ads for second mortgages don’t always make it clear that they are secured loans. That may sound good, but the security isn’t for you – it’s for the bank. When you take out a second mortgage, you are promising the lender that if you can’t make the payments; they can get their money back by selling your house. That is the single most important thing you need to understand about second mortgages. If you default on a second mortgage, you CAN lose your home.
There are good and bad reasons to take out a second mortgage.
Those same ads also often use tempting images to convince you that taking out a second mortgage for fun things is a good idea. Why wait for that cruise when you can put your house on the line to finance it? It’s best to use savings and earnings for fun things and luxuries. A second mortgage is a great way to fund things that will last and give you a return on your investment. Among the best reasons for a second mortgage are
paying for education and training
Education and training can make an enormous difference in your life or the lives of your children. Borrowing money to allow you to change your life for the better is a good investment.
making improvements or repairs to your home
Increasing the value of your home is another excellent reason for taking out a second mortgage on your property. This holds true whether you are making improvements and repairs in order to make your house more marketable, or simply to increase your own enjoyment of it. In either case, you’re using borrowed money to increase your own wealth, one of the best reasons for borrowing.
paying for once in a lifetime events
A wedding can set you back by tens of thousands of dollars. If you can find a second mortgage with payments that fit your monthly budget, taking out a loan against your home can allow you to pay for important lifetime events that you can’t pay for all at once. A better choice for this kind of purpose may be a home equity line of credit, though.
The amount that you can borrow is determined by the amount of equity you have.
The equity you have in your home is the difference between the amount that your home is worth and the amount that you still owe on your mortgage. Here’s a quick example to help you understand.
Suppose you bought a house for $200,000, and put down a down payment of $20,000. The day that your mortgage closes, your home equity is the same as your down payment – $200,000 (home value) – $180,000 (amount owed on mortgage) = $20,000 (equity). Now imagine that five years have passed, and you’ve made your payments faithfully. You’ve paid down $13,000 on your mortgage, and now owe $167,000 on it. Your home’s value has increased to $250,000. Your home equity is now $250,000 (home value) – $167,000 (amount owned on mortgage) = $83,000.
Depending on your credit and the housing market, you may find lenders who are willing to lend you up to 125% of your home equity, but it’s more common for them to lend 60-80% of home equity. Thus, with $83,000 in equity, you may be able to borrow from $49,800 to $103,750.
The interest rate that you’ll be offered is dependent on your credit rating.
As with any other loan, the interest rate on your second mortgage will depend on how good your credit rating is. The better your credit rating, the lower your interest rate will be. You can affect that interest rate by taking the time to clean up your credit before starting to look for a second mortgage.
Shopping around for second mortgage rates is always a good idea.
Don’t just take the first second mortgage that you’re offered, though. Every lender has different ways of factoring in credit ratings and other factors, so it’s definitely to your benefit to shop around and get several loan quotes before making a decision.
It can take several weeks to get a second mortgage approval, but there are ways you can speed up the process.
One of the best things you can do in the interests of speeding up the process of loan approval is to get your own home appraisal before applying for a second mortgage. It’s not foolproof, but many lenders will happily take your expert’s appraisal rather than pay for one of their own.
By: Brian Jenkins