The Ups and Downs of 2nd Mortgages


Second mortgages -- a way to close out the initial mortgage in favor of lower rates, a means of paying off debts. Emergency money. May also be use against the first mortgage debt. Whatever you call it, it still means that you have another means of adding to the amount you owe.

Second mortgages are primarily split into two choices that both rely on one thing. The two choices are a home equity fixed loan and a home equity line of credit. Well, there are also secondary choices like 125% 2nd mortgages or refinancing, but let's focus on these two types of 2nd mortgages that have one factor in common: home equity.

So first, what is home equity? It is simply the difference between the current value of your house and the remaining principal on the mortgage. Say you've paid $45,000 on a $90,000 house, and during the same time you were paying the mortgage, the house gained value and is now worth $120,000. Subtract the $45,000 you still owe from the $120,000 value and you've a rough estimate of your equity. This is where these two 2nd mortgages base the amount you can borrow.

Second mortgage number one:

The home equity fixed loan features a fixed rate of interest unchanging during the duration of the 2nd mortgage. This presents a one-time withdrawal, without as much fuss as its counterpart. It is straightforward and the safer of the two 2nd mortgages. This is great for those who want to be on the safer side of things and are compulsive buyers. You cannot add to this loan; you can only pay for it.

Second mortgage number two:

A home equity line of credit, which features a more flexible arrangement. There are two periods: the draw period and repayment period. In the draw period, one may borrow more from the loan, as needed and as agreed upon in the contract governing the 2nd mortgage. In the payment period, no additions can be made and the 2nd mortgage should be paid off. The line of credit is dependent on agreements and terms set both by lender and borrower.

Pretty sweet deals right? Only if you know how to make use of them. You see, 2nd mortgages are big financial risks. Solutions, too, but, largely, risks. Banks don't just give away money for nothing. They will try and probably succeed in making profits out of you.

Closing out mortgages using second mortgages charges closing and originating fees at the same time. Also, the interest rates for 2nd mortgage number two can balloon depending on market situations. This can mean a ton of interest increases and further debts.

So, 2nd mortgages are double-edged swords. But think about it, isn't everything? So, it is up to you to make 2nd mortgages work, and that can be done by researching your plan and thoroughly thinking things through. Ask advice from the pros -- you don't have to sign up with 2nd mortgage sellers to ask technical terms and processes from them. Look real hard at where you are right now and ask the crucial question: "Do I really need this?"