What is a second mortgage or home equity loan?
A second mortgage (also known as a home equity loan) can be used to help reduce your monthly debt payments, make home improvements, or free up cash for whatever you want. Because you are using the value of your home as the loan’s collateral, the amount of money you are entitled to borrow is often quite high (typically up to 80% of the value of your home).
Why get a second mortgage or home equity loan?
You can use a second mortgage to help you purchase a new home for up to 100% of its appraised value. Second mortgages or home equity loans are also commonly used for home repairs or renovations, as the assumption is that you will repay your loan after the sale of your house (which now has more value thanks to the improvements). You can also use a second mortgage for consolidating credit card debts by reducing your rates and payments and converting compound interest into simple interest.
What are the different types of home equity loans?
While all home equity loans borrow against your home’s equity (hence the name), there are different types available. The right second mortgage loan for you depends on your financial situation and personal circumstances.
Lump sum: Traditional second mortgages are a lump sum borrowed against the equity, or monetary value, of your property. If you want to borrow more money after repaying, you need to reapply for another loan.
Line of credit: A HELOC (Home Equity Line of Credit) loan is a line of credit from your bank that uses the equity of your home as collateral. A HELOC loan can be paid off and borrowed again without reapplying, like a credit card or a traditional line of credit.
How much will a home equity loan cost me?
Like other types of loans, the lender requires the second mortgage or home equity loan to be secured by a second mortgage lien. A mortgage lien is a form of conditional ownership of the loan’s collateral (e.g. your property). This means that if you default on your payments, your home loan provider can enter foreclosure and take ownership of your home. This is why second mortgages are not recommended for emergency funds or risky ventures. If you default on your payments, you are in danger of losing your home.
Interest rates are typically higher for second mortgages because the lender is at a higher risk in case of default. This is because the second lender will not receive any money from the sale of the house until the first lender is paid, and if there is no money left over, they will lose their money. However, since your home’s equity (or value) is the collateral for the loan, second mortgages often offer better interest rates than unsecured debt, such as credit cards.
How can I get a home equity loan or second mortgage?
There are many different providers of home equity loans and second mortgages. It’s important to choose a lender you trust and a loan that suits your needs and unique financial situation.