subject: All About Second Mortgages in Residential Real Estate [print this page] All About Second Mortgages in Residential Real Estate
In general, there are two types of second mortgages: home equity credit lines, along with the more classic home equity loan. Selecting between these particular mortgages is dependent upon the requirements of the homeowner or home buyer.The home equity line of credit (HELOC) generally carries a shorter term allowing it to be drawn upon such as a credit card. Checks are written against a home equity line of credit as a way to cover unpredicted costs. Interest payments are made monthly if there is an outstanding balance. Second mortgage rates for home equity credit lines are based upon short term rates, which makes them typically lower than the first mortgage rate. The danger with a home equity line of credit is the fact that the total balance is payable at maturity. Running up the balance due on a home equity credit line will increase the danger of higher rates when it comes to refinancing, or the chance that the credit line may not be renewed at all. There is substantial competition among mortgage companies for these home mortgages, which lessens this risk to some extent.The more classic second mortgage loan is the home equity loan. Home equity loans will be fixed-rate loans amortized over a longer term than home equity credit lines. Because the rate is fixed, the interest is usually higher than that of a first mortgage loan. The benefit of the home equity loan is that it amortizes to a zero balance over the period of the loan. Consequently, it does not have any refinance associated risk.There are plenty of functions for 2nd mortgages. A traditional home equity mortgage is frequently useful for home and garden projects that can contribute value to a home. However, the use of them is often not limited. Some homeowners use these loans to condense other debts simply because the interest rate, though greater than 1st home mortgage loans, is normally lower than higher-interest debts such as charge cards. Many house buyers with restricted capital available for a down payment may use a 2nd mortgage rather than private mortgage insurance coverage. This is often referred to as an 80/20 loan, since the first mortgage loan represents 80% of the acquisition cost with the 2nd home loan bridging the balance.
