Second mortgages differ from first mortgages in that the interest rate may be higher, and they are almost always for a shorter period of time. Usually the longest second mortgages can last is 15 or 20 years, while some may require full repayment in just one year. Many people use the terms ‘home equity loans' and ‘second mortgages' interchangeably, and they are much the same, but often second mortgages do not require any equity.
- Terms of second mortgages:
It is possible to borrow up to 125% of your home's value, and you will generally be able to get a low interest rate. However, there are some fees associated with second mortgages. Sometimes lenders will require a large payment at the end, called a ‘balloon.' Sometimes you will have to pay ‘points.' One point equals one percent of the amount you borrowed. If, for example, the loan required you to pay five points, you would pay five percent of the amount. With second mortgages, you will almost always have to pay some kind of fee for borrowing the money, so remember to take these costs into account and not focus solely on the interest rate.
- Types of second mortgages:
Traditionally, second mortgages offer fixed interest rates and fixed payment schedules. There are also, however, lines of credit available that work more like a credit card, with the borrower taking the money when he needs it as long as he doesn't exceed the set borrowing limit. These often have adjustable rates. Usually they adjust according to the market rate, but as a borrower you will want to find out exactly how often and for what reasons your rate may be adjusted.
- Why do people want second mortgages?
With second mortgages, you are getting a loan at a low interest rate, and the interest can be deducted from your taxes. You can use second mortgages in many ways that will save you money. For example, if you get a second mortgage with an interest rate of 6%, you can use it to pay off your credit card debt that may have an interest rate of 20% or more. In this way second mortgages are much like home equity loans, but if you haven't built up much equity yet second mortgages may be your only option.
- How to shop for second mortgages:
Comparison shopping is the best way to get a great deal. Of course you will want to talk to your current mortgage company, especially if you are happy with their service, the process is simplified for current customers, and often they will offer you special deals. Don't be afraid to explore your other options, though. Know what is out there even if you are satisfied with your current provider. The Web is a great place to find many lenders for second mortgages, and compare rates.
Find a plan that gives you a good rate, and meets your personal needs for size and length of payments. We want your search for second mortgages to go as smoothly as possible!