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
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
A Second Mortgage on your Home
A second mortgage is when you take another loan after the initial one that was loaned to purchase the home. The second loan has a higher interest rate than the first one as the risk for the lender to lose his money becomes higher. The loans are secured against the home and should you at any time find yourself in financial difficulty and not be able to pay off the loan in full the lender has the legal right to sell your home to regain his money.
A second loan should not be considered lightly for the reasons discussed above, but if you have decided that you are willing to place your home on the line and want to borrow this loan then you should do yourself a favor and first shop around banks and money lenders for the current interest rates. You need to make sure that you get the lowest interest rates in town. Every saving no matter how small helps in the end.
The first loan will get priority, so this would be paid off first then the money that remained, if there was any, would cover the cost of the second loan. If the sale of the house did not produce enough money to pay off the second loan in full the lender of that loan would be the loser. This is why they impose a larger rate of interest to cover themselves against loss.
The qualifications for securing a loan are much the same as for the first mortgage. You need to have a good credit history and be able to give a statement of your income and expenditure for the month to prove that you can afford this loan.
This loan is very handy to pay for the education of a child who is preparing to start college. The expenses are astronomical and very few parents can cope with this venture without the help of a loan. Usually you are entitled to loan quite a large amount of money on a second mortgage so this will be of great help to get the prospective student started. By the time your child graduates you will be well on your way to finish paying off the loan.
By: Lee Van