2nd Mortgage - Home Equity
Credit Line
If you need to borrow
money, home equity lines may be one useful source of credit.
Initially at least, they may provide you with large amounts of
cash at relatively low interest rates and they may provide you
with certain tax advantages unavailable with other kinds of loans.
(Check with your tax advisor for details.) At the same time, home
equity lines of credit require you to use your home as collateral
for the loan. This may put your home at risk if you are late or
cannot make your monthly payments. Those loans with a large final
(balloon) payment may lead you to borrow more money to pay off
this debt, or they may put your home in jeopardy if you cannot
qualify for refinancing. If you sell your home, most plans require
you to pay off your credit line at that time. In addition, because
home equity loans give you relatively easy access to cash, you
might find you borrow money more freely.
Remember too, there
are other ways to borrow money from a lending institution. For
example, you may want to explore second mortgage installment
loans. Although these plans also place an additional mortgage on
your home, second mortgage money usually is loaned in a lump sum,
rather than in a series of advances made available by writing
checks on an account. Also, second mortgages usually have fixed
interest rates and fixed payment amounts.
You also may want to
explore borrowing from credit lines that do not use your home as
collateral. These are available with your credit cards or with
unsecured credit lines that let you write checks as you need the
money. In addition, you may want to ask about loans for specific
items, such as cars or tuition.
2nd Mortgage Term
Some second mortgage
loans may extend for as long as 15 or 20 years; others may require
repayment in one year. You will need to discuss the repayment
terms with the individual mortgage company and select one that
offers terms that best suit your needs. For example, if you need
to borrow $20,000 to make repairs on your home, you may not want a
loan that requires you to repay the entire amount in one or two
years because the monthly payments may be too high.
Payment Calculations
Be sure you understand
how much your monthly payments will be and what they cover. Your
mortgage company should be able to give you this information in
advance. With some loans, you will be required to make monthly
payments on the principal and interest. With other loans, you may
be required to pay interest only on the borrowed amount. With
these loans, your monthly payments will not reduce the principal
amount of the loan. With such a loan, you will be required to pay
back the entire borrowed amount at the end of the loan period.
These loans are popularly known as "balloon loans." If your loan
has a balloon payment, you should consider how you will arrange to
repay the entire amount when it becomes due. On "home equity
lines," the mortgage company does not have to give you the exact
amount of the monthly payment, but must explain how it is figured.
This is because the borrowed amount will vary and your outstanding
balance will change if you use the line of credit. However, if
your monthly payment term is 5% of the outstanding balance and
your outstanding balance is $5,000, your minimum monthly payments
would be $250.
Loan Costs
Many companies will
charge a fee for lending you money. The fee is usually a
percentage of the loan and is sometimes referred to as "points."
One point is equal to one percent of the amount you borrow. For
example, if you were to borrow $10,000 with a fee of eight points,
you would pay $800 in "points." The number of points mortgage
companies charge varies, so it may be worthwhile to shop around.
If the fee seems too high, you may be able to bargain for or find
a lower fee. Be sure to get the amount of the fee in writing
before you take the loan. Many states limit the amount of fees a
mortgage company may charge on a second mortgage loan. You may
want to check with your state's consumer protection office or
banking commissioner to determine whether there is a limit in your
state.
Interest Rates
If you have a
fixed-rate loan, the interest rate is set for the life of the
loan. However, many companies offer variable rate mortgages, also
known as adjustable rate mortgages or ARMs. These provide for
periodic interest-rate adjustments. If your loan contract allows
the mortgage company to adjust or change the interest rate, be
sure you understand when the company has the right to change the
interest rate, whether there are any limits on how much the
interest or payments can change, and how often the company can
change the rate. You also should know what basis the company will
use to determine a new rate of interest.
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