Second mortgage has emerged as a powerful financial tool over the last few years. With the help of second mortgage loan, you can finance your home improvement project, your kid’s college education or even buy a vacation home.
Generally, a second mortgage loan carries higher interest rate compared to the first mortgage loan. This is so because, second mortgages are considered to be more risky. The reason behind this is that, in case of any default, the first mortgage loan is paid back first and remaining funds are used for repaying second loan. Other than high interest rates, the second loan also carries closing costs, just like first mortgages. So, you have to very cautious when considering a second mortgage loan.
In order to choose the best second mortgage program, you should know about all the loan types that are available in the market.
Loan types that you can opt for:
• Home Equity Loan-In this kind of second mortgage loan, home equity, which is the difference between the current value of your home and the principal balance of your first loan, is used as the collateral. If you take a home equity loan, you get the loan amount as lump sum with a fixed tenure of repayment. Generally, home equity loans are available at fixed rates, but you can also find them in the form of adjustable rate mortgage.
• Home Equity Line of Credit- This type of second mortgage also uses the home equity as collateral. But, the difference with the home equity loan is that, here, you are offered a fixed limit creditline, instead of lump sum payment. In this case, you are provided with checks and debit card, so that you can borrow funds time to time from your available creditline.
• Over Equity Mortgage Loan – In case of this kind of second mortgage, you can borrow an amount, which is greater than the value of your home equity. This type of loan is also called Second Mortgage in Excess, as you are able to borrow money in excess of your home equity. Naturally, this kind of second mortgage loans are expensive ones and you are not entitled to any tax deduction for these loans.
If you make the right choice out of the second mortgage loan types, discussed above, there is no doubt that you can save substantial amount of money.
