Most average Americans are able to purchase their own home with a mortgage. And, while paying off the first mortgage, other needs for money arise, such as money for a child’s education plan, cash for home improvements, capital operations for a small business, or to pay off personal debt. A second mortgage can even be used to pay off a first mortgage.
A second mortgage is usually based on equity – your interest in your home as a homeowner, based on the mortgage payments you make and the appreciation in value of your home property.
In addition to being a second mortgage to a first mortgage, second mortgages differ from first mortgages in terms of interest rates. The interest rate on a second mortgage is usually higher and is usually paid in a shorter period of time. In addition to this, a large payment, known as a balloon payment, is required at the end of the payment period.
Often, refinancing is an option for second mortgages, especially when interest rates are low, because the interest rate on the second mortgage is higher than the interest rate on the first mortgage. On the other hand, second mortgages have other features that make them more attractive than refinancing. These include less stringent contractual guidelines that reduce the time and effort required to obtain a second mortgage. In addition to this, the lower transaction costs of a second mortgage can override the higher interest rates and may also be less expensive than refinancing in the long run.
Traditionally, second mortgages have an established repayment schedule and are offered as fixed loans. However, there are currently three options from which you can choose. They are: a conventional second mortgage, a home equity loan, and a home equity line of credit. We will briefly discuss the features of each below
a. Second Mortgage. This type of loan is ideal for situations where you need a lump sum of money, especially for home improvements. Second mortgages can be fixed rate or adjustable rate for 5 to 20 years, but usually 15 years. 75% to 80% of the appraised value of the home is the loan limit for both types of combined loans.
In a second mortgage, the interest rate is higher than in a first mortgage, especially if it is a fixed second mortgage. On the other hand, an adjustable second mortgage has a lower interest rate, but a higher profit margin. The loan is usually closed in two to three weeks and the amount to be paid at the end is usually two to three percent of the total loan amount. Requirements needed when applying for a second mortgage include a home appraisal and credit check.
b. Home Equity Loans. A home equity loan is the same as a conventional second mortgage, but differs in two ways. First, unlike a second mortgage, it has a lower interest rate, and second, the lender can waive closing costs. Most types of this loan are adjustable in the marketplace.
A home equity loan is typically used for home improvements and renovations, and just like a second mortgage, it can be used for business financing.
c. Home Equity Line of Credit. This type of loan is ideal for situations where funds are needed on a regular basis, such as for debt consolidation or to pay for college programs or tuition. Just like a second mortgage, a credit check and home appraisal are required prior to obtaining this type of loan.
The loan amount is usually 75% to 80% of the appraised value of the home, and the interest rate can be adjusted. Some lenders waive closing costs, but others may have closing costs totaling up to $1,000 plus points.