Homeowners often find that their equity is locked up in their house when they need some cash, and home buyers often find that the best terms for first San Diego mortgage loans require a 20% down payment. Second mortgages provide a way for homeowners to access their equity and for home buyers to bridge the equity gap for their down payment.
What are Second Mortgages?
A second mortgage is a loan secured by a property where there is already a loan, the first mortgage loan, in place. If the second loan were to go in to default, the lender would essentially have to pay off the first mortgage loan to gain access to their collateral. Lenders, therefore, consider seconds to be riskier loans.
Types of Second Mortgages
In general, there are two types of second loans: home equity lines of credit, and the more traditional home equity loan. Choosing between these types of mortgages depends on the needs of the homeowner or home buyer.
A home equity line of credit (HELOC) usually has a shorter term and can be drawn upon like a credit card. Checks can be written against a home equity line of credit as a way to pay for unexpected expenses. Interest payments are made monthly when there’s a balance outstanding. Second mortgage rates for home equity lines of credit are based on short-term rates, and are usually lower than the first mortgage rate. The risk with a home equity line of credit is that the entire balance is due at maturity. Running up the balance of a home equity line of credit increases the risk of higher rates at refinance, or the possibility that the line of credit may not be renewed at all. There is considerable competition among lenders for these mortgages, which minimizes this risk to some degree.
The more traditional second mortgage loan is the home equity loan. Home equity loans are fixed-rate loans over a longer term than home equity lines of credit. Because the rate is fixed, the interest rate is usually higher than that of a first mortgage. The benefit of the home equity loan is that it amortizes to a zero balance over the term of the loan. Therefore, there is no refinance risk.
Ways of Using Second Loans
There are many uses for second loans. A traditional home equity loan is often used for home improvement projects that can add value to a home. However, their use is often not restricted. Some homeowners use them to consolidate other debts because the interest rate, though higher than first mortgages, is often lower than higher-interest unsecured debt such as credit cards. Many home buyers with limited funds available for a down payment can use a second loan instead of mortgage insurance. This is often referred to as an 80/20 loan, because the first mortgage represents 80% of the purchase price with the second mortgage bridging the remainder of the purchase price.
Home equity lines of credit can also be used in many of the ways noted above. They also have the added benefit of being able to be used as an emergency line of credit. The interest rate is generally much cheaper than credit cards, making this a smart alternative.
Conclusion
Secondary financing can offer home owners financial flexibility. These types of loans can be added with a first mortgage in place for home improvement projects, bill consolidation, a line of credit, or even to provide some of the 20% of a loan than isn’t covered by a first mortgage in a home purchase.
Other Topics of Interest:
Equity Mortgage: A home equity mortgage loan is a mortgage that places the home as the collateral, and allows the homeowner to easily borrow against the value of equity in their home.
Bad Credit Home Mortgage Refinance: Refinancing a mortgage can be a very daunting task for anyone. People with good credit can still find it scary, let alone those with bad credit, who may find it all but impossible. However, a bad credit home mortgage refinance is still possible.
Where to Look for Your San Diego Mortgage: Various ways to go about finding a good lender who will take care of your mortgage needs.
No Cost Refinance Loan: The idea of what’s called a “no cost refinance loan” seems to be a very enticing. No cost usually means no payment, or no fees, but while this might be true to some extent, it is very important to know what no cost refinance loans really are.