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Which Second Mortgage Is Best For You
(Obtaining a mortgage means that you lack the necessary funds to purchase a property in full.)
A second mortgage is subordinate to the first one on the same mortgage. It is common belief that a second mortgage is that last resort if a first mortgage is not supportive enough to your needs.
The article, "Fixed Rate Home Equity Loan Versus Adjustable HELOC: Comparing 2nd Mortgage Loans," written by Maria Ny and posted on jumboloanrates.net on September 13, 2006, provides the two second mortgage options and the details associated with both.
"Many people think of a second mortgage as a fixed interest, lump sum loan. However, that is only one form of a second mortgage. A second mortgage is actually ANY secondary lien on your home--secured loan with your home pledged as collateral."
There are two primary categories of second mortgages: fixed mortgage rate home equity installment loans (HELs), or home equity loans and home equity lines of credit (HELOCs), which are adjustable rate mortgages.
"The Federal Reserve states that the home equity line of credit annual percentage rate (APR) is a variable rate loan based solely on a publicly available index (such as the prime rate published in the Wall Street Journal or a U.S. Treasury bill rate). The APR does not include points or other finance charges."
The monthly payment on a HELOC will adjust when your loan balance and interest rate does. Terms traditionally range from 15 to 30 years.
HELOCs also have a draw period, which usually occurs in the first 10 to15 years. During the draw period, you can withdraw money similar to that of a credit card without applying for a new separate loan, assuming the amount does not exceed the amount of the original HELOC.
The remaining term on the loan is referred to as the repayment period. "During the repayment period you may be allowed to renew the credit line. If your plan does not allow renewals, you will not be able to borrow additional money once the draw period ends. Interest is paid only on the amount of equity you use."
"A Home Equity Installment Loan (HEL) is a fixed mortgage rate loan, which means the annual percentage rate (APR) and monthly payment will stay the same for the life of your loan. The APR for a HEL takes into account the interest rate charged plus points and other finance charges. Loan terms can be anywhere from 5 to 30 years, but are typically 15 to 20 years."
Contrasting to a HELOC, you will be required to immediately begin paying principal and interest on the lump sum you will receive. If you discover later that you need additional financial assistance, your only option is to apply for an additional loan with additional closing costs.
"Which type of loan you choose depends on your financial needs. A HELOC may be best if you have a recurring need for money (e.g., home improvements or a home repair project that has anticipated additional expenses). The security of a fixed-rate 2nd mortgage will probably provide much-needed relief for a large one-time expense (e.g., debt consolidation)."
Both options provide you the additional financial assistance you need. Choose wisely, because, like every mortgage, you do not want to sign anything you do not completely understand since you will be making monthly payments on it for a large potion of your life.