What Are The Different Types of Second Mortgage Loans?
Maybe you have heard of second mortgage finance but do not have a clear idea of it. In that scenario, you can go through this blog to understand this financial solution in detail. You can take out a second mortgage against the equity in your house. For instance, you have a property worth $ 2,50,000, and you still owe $ 1,50,000 on the principal amount to your first mortgage lender.
So, it translates that you have equity of $ 1,00,000 in your property. Now, you can borrow a second mortgage against your equity in the house. Also, a second mortgage features several types. It helps a person take out a loan as per his choice.
Different types of second mortgage finance
Generally, lenders offer two types of second mortgages. You can go through the following points to know about them.
1. Home Equity Finance
As we mentioned earlier, a second mortgage loan comes in different forms, and home equity finance also falls in this category. Although you have heard of such finance, maybe you are not aware of it. So, we will share the basics of home equity loans in this blog.
For instance, you have some equity in a property or house. The percentage of the share can be 100% or less than that. In that scenario, a second mortgage lender can let you borrow based on your equity in the property. But, generally, lenders do not provide loans for 100% of your share in the property.
Still, some lenders agree to offer the borrowers up to 90% of their equity in the home. Although home equity loans feature a fixed interest rate, sometimes the rate becomes adjustable. But, generally, most second mortgage lenders provide this finance at a fixed interest rate.
That is why you need to pay the same amount monthly to your lender for reimbursing the home equity finance. Since a home equity loan is another term-finance, it usually features a long tenure of 5–30 years.
2. Home Equity Line of Credit (HELOC)
Home equity line of credit is another type of second mortgage finance that works like a credit card. Although it is a kind of home equity finance, HELOC works differently than home equity loans.
While in the case of home equity finance, you need to borrow a lump sum and fixed amount from the lenders, HELOC lets you draw funds as per your wish. Such second mortgage finance sets up a line of credit based on the borrower’s equity on the property.
So, it means that the lenders offer flexibility to draw down the credit line according to the requirement of the borrowers. In that case, you only need to repay the amount of line you utilize.
While home equity features a fixed monthly repayment amount, the monthly reimbursement amount of HELOC fluctuates depending on the drawn amount. The private lender even offers a card to the borrowers for drawing funds. But, HELOC features 2 phases- the draw tenure and the reimbursement period.
During the draw term, a borrower can borrow the required amount against the line of credit. It can last for 5–10 years. But, the individual needs to repay the principal with cumulative interest during the repayment phase.
Generally, lenders feature a reimbursement phase for 10–20 years in the case of HELOC. If you fail to repay the second mortgage after the HELOC period gets over, the lender can come after your property. Anyone can admit that this second mortgage finance offers a plethora of conveniences.
As it gives the borrowers a chance to borrow as per their wish, the homeowners do not need to carry the extra burden. But, one needs to be careful with the rules and regulations of HELOC while applying for this finance.
Wrapping It Up
Although the second mortgage features a higher interest rate than the primary mortgage, it features a plethora of flexibilities to the borrowers. Firstly, any second mortgage finance provides a high loan amount, and even some lenders offer up to 90% of the property’s equity. Secondly, you can utilize the fund as per your choice. Most lenders do not restrict the usage.
