March 19th, 2018 6:59 AM by Jackie A. Graves
home equity loan — also known as a second mortgage, term loan or equity loan —
is when a mortgage
lender lets a homeowner borrow money against the equity in his
or her home. If you haven’t already paid off your first mortgage, a home equity
loan or second mortgage is paid every month on top of the mortgage you already
pay, hence the name “second mortgage.”
home equity loan or second mortgage can be a source of money to fund your
major financial goals, such as paying for college education or medical
bills, and can prevent building up credit card debt with high interest
rates. Just beware: with a second mortgage, you are putting up your
home as collateral for the loan, so if you default on this second mortgage, the
bank can take your home. And this type of loan will reduce the equity you have
in your home. So when you sell your home, you’ll have to pay off both your
first and second mortgages with your sale proceeds.
sure you’re able to pay a second mortgage on top of the mortgage you’re already
paying. Plan carefully and talk to your financial adviser to see if a second
mortgage makes financial sense for you.
equity loans or second mortgages are different than a home equity line of
credit (also called a HELOC). With a home equity line of credit, you receive
a line of credit secured by your house, and you can use it as you need it,
similar to a credit card. With a home equity line of credit, you won’t
receive a lump-sum payment like you would with a home equity loan.
amount of money you can borrow with a home equity loan or second mortgage is
partially based on how much equity you have in your home. Equity is the
difference between the value of your home and how much you owe on the mortgage.
example may help illustrate: Let’s say you own a house now valued at $300,000.
You put down $30,000 when you bought it and have paid down $30,000 in mortgage
principal. You would have $60,000 in equity ($300,000 value of home – $240,000
still owed = $60,000 in equity) in the home.
lender would use this equity number — in addition to your credit score and
income — to determine how much of a loan you will get. Your lender
will need to pull your credit report and verify your income to determine
the interest rate you’ll pay for your second mortgage.
homeowners borrow up to roughly 85 percent of the equity in their home.
The longer you pay down the mortgage and the more your home appreciates in
value, the more equity you build up in the home and the larger a home equity
loan you may qualify for.
you get a home equity loan, you will receive the entire amount of the loan all
at once, as opposed to a home equity line of credit, which works similar
to a credit card, where you take just what you need when you need it, and
then pay it off in monthly installments. Often, you have to pay off a home
equity loan or second mortgage within about 15 years, though the terms vary.
The interest rate on the loan is typically fixed.
to your first mortgage, second mortgages will require closing costs, which can
cost about 3 -6 % of the amount of the loan. So be sure to shop around for
different offers from lenders,
as the cost of a second mortgage can vary from lender to lender.
a homeowner, you can use home equity loans or second mortgages for almost
anything you want. Since the money comes as a lump sum (unlike a home equity
line of credit), many homeowners use them for large, one-time expenses, such as:
the interest rates on home equity loans or second mortgages are much
lower than rates on credit cards, so this can make financial sense as an
alternative to using a credit card if you’re careful.
equity loans or second mortgages have fees similar to what you paid for your
original mortgage, which may include:
lenders will charge different amounts for fees, and each lender may offer you a
different interest rate. So be sure to shop around and talk to at least 2-3
lenders about a second mortgage or home equity loan, and compare the overall
cost for each loan to find the one that makes the most financial sense for you.
you need a lump sum of money for something important (such as a home repair,
not a vacation or something fleeting) and are sure you can easily repay a home
equity loan or second mortgage, it’s worth considering. The rates on a home
equity loan tend to be significantly lower than rates on credit cards, so a
second mortgage can be a more economical option than paying for what you
need with plastic. And sometimes the interest paid on home equity loans or
second mortgages is tax
deductible, so this may be an added financial bonus (talk to your
tax advisers, as this varies person to person).
remember, you will get all this money in one lump sum, and you can lose your
home if you don’t repay the loan. So make sure that a second mortgage makes
financial sense for you, rather than an option such as a home equity line of
credit, where you can take out the money little by little.
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