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San Diego real estate library
Second Mortgage: A Loan Lovelier the Second Time Around?
Most average Americans are able to buy their own homes through a
mortgage. And, while paying off the first mortgage, other needs
for money arise for necessities such educational plans for the
children, cash for improving the house, money for capitalizing
on a small business or money to pay off personal debts. A second
mortgage can even be used to pay off the first mortgage.
A second mortgage is usually based on the equity - your
interest, as an owner, on your home based on the mortgage
payments you have paid and the increased value of your home
property.
Apart from it being a second to the first mortgage, a second
mortgage is different from a first mortgage in terms of interest
rates. A second mortgage usually has a higher interest and is
usually paid in a shorter time span. Aside from this, a single
large payment called balloon payment is also made at the end of
the paying period
Usually, refinancing is an alternative for second mortgage
especially when interest rates are low because higher rates
apply on second mortgages than on the first one. On the other
hand, there are other features of a second mortgage which makes
it more enticing than refinancing. This includes the looser
contract guidelines which reduces the amount of time and effort
to get that second mortgage. Apart from this, second mortgage
may have lower transaction costs that can override the higher
interest and which may also, in the long run, cost less than
getting a refinancing.
Traditionally, a second mortgage has established repayment
schedules and is offered as a fixed loan. But, at present, there
are three options from which you can choose from. These are: the
traditional second mortgage, a home equity loan and home equity
line of credit. We will discuss the features of each briefly
below
a. Second mortgage. This loan is ideal for situations where you
need the money in lump form especially for home improvement.
Second mortgage can be found as either fixed-rate or adjustable
from 5 to 20 years but typically 15 years. Seventy five to
eighty percent of the appraised value of the home is the loan
limit for both merged loans.
In a second mortgage, interest rates are greater than that of
the first mortgage especially if this is a fixed second
mortgage. Adjustable second mortgage, on the other hand, have
lower interests but have higher margins. Loans usually closed in
two to three weeks and the amount to be paid during closing is
usually two to three percent of the total loan amount.
Requirements needed when applying for a second mortgage consist
of home appraisal and credit check.
b. Home Equity Loan. A home equity loan is similar to the
traditional second mortgage but is different in 2 ways. First,
unlike second mortgage, this has lower interest rates and
second, lenders can waive off closing costs. Most types of this
loan being offered are adjustable in the market.
A home equity loan is often used for home improvements and
renovations just like a second mortgage and it can also be used
to finance a business.
c. Home Equity Line of Credit. This type of loan is ideal for
cases where there is a need for funds occasionally such as for
debt consolidation or for payments of college plans or tuition
fees. Just like in a second mortgage, a credit check and a home
appraisal is required before you can be given this type of loan.
The loan amount is usually seventy five to eighty percent of the
home's appraised value and the interest is adjustable. Some
lenders waive off closing costs but others could total up to
$1,000 plus points.
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