What is a second mortgage? The actual term used in the financial industry for this type of debt is called a “home equity loan.” That has a nicer ring to it, don’t you think? Creates a more positive twist to extra debt, almost warm and fuzzy.
In reality, a second mortgage is just what it sounds like – another loan against your property, with the accompanying monthly payment.
In fact, sometimes a home equity loan can be the primary loan. The difference between this and the straight-up initial mortgage is that generally a home equity loan comes with restrictions on how you can use the cash (college bills, home repairs or improvements, and so forth) whereas a first mortgage is used to pay for the purchase of the property. Sometimes the closing costs are less for a home equity loan.
If you have equity in your home and you need to tap that resource for extra cash, it would be preferable to refinance into a single home equity loan. If you have good credit, enough equity and a good relationship with your banker, you may be able to simply promise you will be using the new loan to improve your home in some way (add a deck, put on a new roof, etc.), or for another allowed purpose. Your closing costs and interest rate may be lower, and you’ll only have one loan payment.
What if your only option is to obtain a second mortgage against your home or other property? Here are some nuts and bolts of this type of home equity loan:
1. Closed End Loan
This type of second mortgage comes with a fixed interest rate and you have up to fifteen years to pay it in full if the lenders allows. A shorter loan will cost less in the end.
2. Open Ended Loan
This type of home equity loan will allow you to borrow money when you want it. It’s based on the same factors as the Closed End Loan, but your loan officer sets up a line of credit that will always be there. These lines of credit can have a longer term, up to thirty years, but will have an adjustable interest to compensate.
3. Loan Factors
The total amount of money you can expect to receive for a second mortgage of either type will depend on your income, your other debts, your credit score and, of course, how much your home is valued for. After the real estate debacle a few years ago, lenders are more leery of issuing second mortgages but if all these factors are in your favor, you might qualify.
Sometimes circumstances will make a second mortgage the best option. Just remember that you are adding another loan payment to your monthly bills and putting your home up as collateral for a debt that has the potential to bury you for the foreseeable future.
Now that you understand more about what a second mortgage is, and how it is one type of home equity loan, we hope you will seriously consider other options such as refinancing into another larger loan if at all possible. Do what you must, but weigh your options carefully and look for the lowest closing costs and interest rate if you decide to take out a second mortgage home equity loan.