2nd mortgage: A Loan Lovelier the Second Time Around?
Most average Americans are able to buy their own homes through a mortgage. And, while paying off the first mortgage, other needs for money arise for necessities such educational plans for the children, cash for improving the house, money for capitalizing on a small business or money to pay off personal debts. A 2nd mortgage can even be used to pay off the first mortgage.
A 2nd mortgage is usually based on the equity - your interest, as an owner, on your home based on the mortgage payments you have paid and the increased value of your home property.
Aside from it being a second to the first mortgage, a 2nd mortgage is different from a first mortgage in terms of interest rates. A 2nd mortgage usually has a higher interest and is usually paid in a shorter time. Aside from this, a single large payment called balloon payment is also made at the end of the paying period
Usually, refinancing is an alternative for 2nd mortgage especially when interest rates are low because higher rates apply on 2nd mortgages than on the first one. On the other hand, there are other features of a 2nd mortgage which makes it more appealing than refinancing. This includes the looser contract guidelines which reduces the amount of time and effort to get that 2nd mortgage. Apart from this, 2nd mortgage may have lower transaction costs that can override the higher interest and which may also, in the long run, cost less than getting a refinancing.
Traditionally, a 2nd mortgage has established repayment schedules and is offered as a fixed loan. But, at present, there are three options from which you can choose from. These are: the traditional 2nd mortgage, a home equity loan and home equity line of credit. We will discuss the features of each briefly below
a. 2nd mortgage. This loan is ideal for situations where you need the money in lump form especially for home improvement. 2nd mortgage can be found as either fixed-rate or adjustable from 5 to 20 years but typically 15 years. Seventy five to eighty percent of the appraised value of the home is the loan limit for both merged loans.
In a 2nd mortgage, interest rates are higher than that of the first mortgage especially if this is a fixed 2nd mortgage. Adjustable 2nd mortgage, on the other hand, have lower interests but have higher margins. Loans usually closed in two to three weeks and the amount to be paid during closing is usually two to three percent of the total loan amount. Requirements needed when applying for a 2nd mortgage include home appraisal and credit check.
b. Home Equity Loan. A home equity loan is like the traditional 2nd mortgage but is different in 2 ways. First, unlike 2nd mortgage, this has lower interest rates and second, lenders can waive off closing costs. Most types of this loan being offered are adjustable in the market.
A home equity loan is typically used for home improvements and renovations just like a 2nd mortgage and it can also be used to finance a business.
c. Home Equity Line of Credit. This type of loan is ideal for cases where there is a need for funds periodically such as for debt consolidation or for payments of college plans or tuition fees. Just like in a 2nd mortgage, a credit check and a home appraisal is required before you can receive this type of loan.
The loan amount is usually seventy five to eighty percent of the home's appraised value and the interest is adjustable. Some lenders waive off closing costs but others could total up to $1,000 plus points.
The loan amount is usually seventy five to eighty percent of the home's appraised value and the interest is adjustable. Some lenders waive off closing costs but others could total up to $1,000 plus points.
