FAQs on Second Home Mortgages
A second mortgage is an additional mortgage loan secured by your home property that is subordinate to your first mortgage loan. Typically purchased in the form of a home equity loan, the second mortgage is secured with your property as collateral, which presents inherent benefits and risks.
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What Are Common Uses?
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Based on the nature of home equity loans as secured loans, experts typically advise their use for major investments, projects or expenses, rather than for everyday or non-essential purchases. You get a low interest rate, which is great for college education, home renovations, unexpected medical expenses and even car purchases. Second mortgages are also routinely used to consolidate debt for higher rate loans and credit cards. In fact, Bankrate notes that 44 percent of home equity loans serve this purpose.
What Are the Benefits of a Second Mortgage Loan?
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Second mortgage loans are a very affordable way to borrow a large sum of money. Since you are securing the loan with your property, lenders take on less risk and offer better rates than you get on unsecured personal loans. They are also more likely to lend to borrowers that do not have adequate credit to get an unsecured loan. Second mortgage interest is also often tax deductible, reducing the real costs of borrowing.
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What Are the Disadvantages?
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The most glaring disadvantage of a second mortgage loan is that you are expanding the risk of loss of your property by leveraging it with more credit. Second mortgages have application and process fees that increase the upfront cost to obtain the loan. When used for debt consolidation, consumers often continue to struggle with the same undisciplined spending that helped them incur major debt to begin with. Some use the newly freed up balances on their credit cards and rebuild the debt paid off by the second mortgage.
What's the Difference Between a Home Equity Loan and HELOC?
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A home equity loan is an amortized loan with a lump-sum distribution following the loan agreement. It works very similarly to your first mortgage, but with a shorter amortization period, often 10 years. A home equity line of credit (HELOC), is a commitment by the lender to loan you funds up to your credit limit. This offers flexibility in that you only borrow what you need, when you need it. You also often get a lower rate on a HELOC than with a home equity loan. After an initial draw period (typically five to 10 years) during which you are only required to pay interest on your balance, your remaining balance is amortized during a payoff period (typically five to 10 years).
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References
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