An Introduction to the Second Mortgage Loan
Learn the difference between a home equity loan and a home equity line of credit. This introduction also explains the best uses for these loans and your legal rights if you change your mind.
Description
The term “second mortgage loan” is not frequently used by lenders anymore. The traditional second mortgage is now more commonly called a home equity loan. A home equity line of credit is also referred to as a second mortgage. Both loans are backed by the equity in your home, but there are differences between them.
Home Equity Loan
The home equity loan is similar to the traditional second mortgage your parents may have had. Equity is the difference between the current market value and the principal balance of the mortgage loan. A home equity loan uses that difference as collateral for a second loan against your home. It doesn’t replace a first mortgage. Because it will be the second debt paid if you default on your loans, it has a higher interest rate than a comparable first mortgage. Most home equity loans have a fixed rate, although some are offered as adjustable rate mortgages. With a home equity loan second mortgage, you receive a lump-sum payment in cash and then repay the loan over a fixed period of time.
Home Equity Line of Credit
A home equity line of credit (HELOC) also uses the equity in your home as collateral. Rather than a fixed sum of money, your lender issues you a credit line with a fixed limit. You access the money by writing checks or using a debit card linked to it. HELOCs have a variable interest rate that is based on the current prime rate plus a percentage. You may borrow funds any time between the issuance of the credit limit and its expiration date, which can be anywhere from three to ten years. Your repayment terms and amounts vary depending on the amount borrowed and current interest rate. Most HELOCs require you to remove an initial sum and not repay it until the line of credit expires. Most also require a minimum withdrawal each time you access the funds.
How to Use a Second Mortgage
Regardless of which type of second mortgage loan you choose, second mortgages should only used to:
Make home repairs
Remodel your home
Pay education expenses for you or your child
Reduce other debts
In other words, a second mortgage should be used to improve your child’s or your financial future. It should not be used for non-real estate investments or purchases of consumer goods like televisions, cars, boats, or other big-ticket items.
Second Mortgage Right of Rescission
You have three business days, not including Saturdays, Sundays, and legal holidays, from the date you sign your home equity loan documents to cancel the loan without cost to you. The loan must be against your primary residence. If you used the same lender as your original loan, then you only qualify for rescission if you increased the amount of your original loan with a cash-out refinance or took out a home equity loan. You can rescind any mortgage refinance or home equity loan within the three day period if you used a different lender.
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By: justin narin
Working With Multiple Lenders In A Mortgage Modification
Nowadays it is not uncommon for a homeowner to have more than one mortgage on the same home. Things can become a little complicated if you plan on modifying multiple mortgages. If your second mortgage is still affordable, then you should continue to make those payments on time and concentrate your efforts on your first mortgage. Your main goal is to have combined mortgage payments that you can afford to pay each month.
If you need to perform a loan modification on more than one mortgage, it’s important to modify both loans at the same time. I have seen many homeowners try to modify their mortgage loans one after the other. This does not work out well because during a foreclosure, time is definitely not on your side. Often times a homeowner will spend 2-3 months to complete their first mortgage modification, only to find out their second one cannot be approved. This will change everything and force the homeowner to devise a new course of action, with not very much time left to implement it. Simultaneously modifying both your mortgages also carries a lot of benefits to the homeowner.
Strategies For Modifying First & Second Mortgage At The Same Time
Another strategy that you can use when negotiating with multiple lenders is to sort of play one lender against the other. You will find that sometimes one lender may agree to a loan modification with little effort, but the other lender may give you a hard time. Now is your chance to inform both lenders that you are negotiating your loan modification with another bank also. Explain to them that if the other lender does not agree to a loan modification, you will have no choice but to allow your home to be foreclosed on. The lender that wants to do a loan modification on your home will often times put pressure on the other lender to approve your loan modification. A bank is a business and they do not want to lose money. If they will lose less money from modifying your mortgage than if they foreclosed on your home, that’s exactly what they will do! This Free Loan Modification kit will teach you how to tailor your loan modification package to send the right message to your lender.
By: FreeDIYkits
What Is A 2nd Mortgage?
A 2nd mortgage refers to a secured loan taken on a property, which has already been used as a security in a loan once before. It refers to the second loan in sequence, as it is subordinate to the first loan on the same property. The 2nd mortgage lender can exercise his rights only after those of the first have been entirely met. One can take the 2nd mortgage for several different reasons including for paying off some debt, to finance education or even to renovate ones house! If you feel that your debt repayment is pretty huge, then maybe you should consider taking a 2nd mortgage. There are generally two types of 2nd mortgage:
· Fixed Rate Loans · Line of credit
Fixed Rate loan — The 2nd mortgage at a fixed rate loan is similar to a first mortgage where you can get a lump sum payment and then pay up the loan in installments over a set period of time. The difference with the first mortgage being is that the 2nd mortgage lender can only exercise his rights on your home, after all the rights of the first mortgage holder has been satisfied. Since the mortgage lender is subject to increased risk, the rate of interest on the 2nd mortgage home loan is generally higher compared to the first one.
Home-equity Line of Credit — a Home-equity line of credit is a variable rate loan, where the borrower is assigned a specified spending limit and can withdraw money as and when required up to this limit. Generally, a variable interest rate is charged in this case, which can lead to increasing interest burden in case of a rise in interest rates.
Both these loans can help you reduce your debt burden. Additionally, 2nd mortgage would also lead to some savings in your tax, as the interest can be deducted from your income while calculating your tax burden. However, one must be careful while availing a 2nd mortgage loan. If the combined value of both the 1st and 2nd mortgage exceeds the value of your home, you could be in a position where you will even the sale of your house will not be able to pay off both your debts. 2nd mortgage also known as home-equity loan gained wide spread popularity in 1996.
Though the interest chargeable on a 2nd mortgage loan is generally higher than that charged on a first mortgage, it is never the less lower than the interest which is paid on credit cards and other consumer loans. The primary reason why people avail of a 2nd mortgage loan is to pay off their balance dues on credit cards. So in addition to lower interest (compared to your credit cards), one can avail of tax benefits also via a 2nd mortgage. However, before mortgaging your house for a second time, make sure you have the means to make the payments before its due date. But if you believe you a responsible borrower and have a steady and regular source of income to meet the loan along with its interest obligation, then it makes sense to avail of this loan.
By: Keisha Seaton