2nd Mortgages: Tap into Your Home Equity
Joy BreilingLoanBiz Columnist
If you are like most Americans, your home is your largest
asset, and your monthly mortgage payments are most likely your largest expense
as well. With so much of your financial picture wrapped up in one asset, it is
important to understand how your home can assist you in reaching your overall
financial goals. A 2nd mortgage is one avenue you may want to explore in using
your home to help grow your financial future.
What Is a 2nd Mortgage?
When you purchase your home, you used your down payment and
a first mortgage to finance your purchase. You may have even gotten a 2nd mortgage
at that time. A 2nd mortgage is a Deed of Trust that is placed behind, or in a subordinate
position, to a new or existing first mortgage loan. The subordinate position
means that the lien for the 2nd mortgage would be paid after the existing first
mortgage in the case of foreclosure and/or the sale of the home. As this is of
greater risk to the 2nd mortgage lender, there are different programs, interest
rates, and criteria as compared to the traditional first mortgage loan. Two
main types of 2nd mortgage loan programs are the Home Equity Line of Credit
(HELOC) and the Home Equity Loan (HELOAN).
Home Equity Line of
Credit vs. Home Equity Loan
A Home
Equity Line of Credit can best be compared to a credit card. You are given a
line of credit by the lender through which you can make withdrawals and repay funds
over a "draw" term (generally 5-10 years). You can disperse the funds
as needed and if you pay back the funds borrowed, you are able to re-disperse
the funds as long as you are still within the "draw" period. However,
the interest rates you would pay on a home equity line are variable, as they
are based on the current Prime Rate.
In
contrast, the Home Equity Loan is dispersed as a lump sum at the beginning of
your loan term and has monthly payments amortized over the term of the loan.
Once you pay down or pay off the home equity loan, the only way to get access
to the funds again is to refinance into a new 2nd mortgage. However, the home equity
loan is a fixed rate 2nd mortgage and not subject to the volatility of current
interest rates.
2nd Mortgage Usage
A
second mortgage can be used for a variety of purposes, including debt
consolidation, home improvement projects, funding an education, or large ticket
purchases such as cars. Since the
interest rates charged on a 2nd mortgage can be substantially lower than other
traditional forms of credit, homeowners can save money and increase monthly
cash flow by utilizing a 2nd mortgage as an alternative to more expensive forms
of borrowing.
As
with all loan programs, take the time to do your research and contact a trusted
lender.
About the Author
Joy Breiling has been employed with the mortgage industry since early 1997. During her career, Joy has fulfilled many positions; including Operations Manager of a large Bay Area broker office. She is currently licensed with the California Department of Real Estate and is an active mortgage originator.
