Second mortgages and home equity loans are perfect for homeowners who need money to make home improvements, eliminate debt, etc. These loans allow homeowners to obtain loans based on the equity in their home. Home equity loans and second mortgages are better than refinancing because funds are received within a few days and homeowners are not required to pay high fees.
What are home equity loans and second mortgages?
Home equity loans and second mortgages provide homeowners with a lump sum of money. For the most part, homeowners take out these loans when they need to make a large purchase or want to consolidate bills. Credit cards and consumer debt carry ridiculously high interest rates. Although second mortgages have higher interest rates than the original mortgage, the rates are much lower than those offered on credit cards. Therefore, the owner can obtain a home equity loan to pay off credit cards. Home equity loans and second mortgages have a fixed rate and an average term of three, five or seven years.
How do these loans work?
To obtain a home equity loan, a property must have sufficient equity. Equity is the difference between the value of a home and the amount owed to the mortgage company. For example, if a home is worth $120,000 and the amount owed to the mortgage lender is $80,000, the home equity is $40,000. Therefore, the owner can receive a home equity loan of up to $40,000. There are cases in which a home equity loan and a second mortgage are granted for more than the value of the home. These are 125% home equity loans. However, these loans carry a very high interest rate and the interest is not tax deductible.
Homeowners who receive a home equity loan must make two mortgage payments. The first payment pays the balance of the original mortgage, while the second payment pays the balance of the home equity loan. Before applying for a second mortgage, homeowners should assess their finances and determine if they can afford an additional monthly payment. Failure to pay on a home equity loan or second mortgage could result in a property being foreclosed on by the lender.