It’s a particularly tough time for homebuyers. Difficult housing market – as prices are much higher than they were two years ago – creating opportunities for homeowners.
That’s because homeowners are sitting in more places. equity than they were just a little while ago.average home owner Acquired approximately $60,200 in equity As of the second quarter of this year, according to data firm CoreLogic, the past year (the difference between the value of your home and your outstanding mortgage payment).
Rising mortgage interest ratebut made one option for utilizing that home equity much less attractive – cashing out refinancingHomeowners will not want to give up a favorable interest rate on their first mortgage in exchange for cash.a Investigation Home equity platform Point found that 35% of homeowners are no longer looking to refinance due to rising interest rates.it is increasingly looking to a second mortgage, or home equity loan and credit line (HELOC).
If you’re a homeowner and your assets have grown, a second mortgage may be attractive. But is it right for you?
Definition of “Second Mortgage”
A second mortgage, also called a junior lien, is a loan secured by a home. A second mortgage is an additional loan that is separate from the primary mortgage used to purchase the house.
A second mortgage is very similar to a primary mortgage. The difference lies in the priority if the mortgage is not paid and the house is sold to pay off the outstanding debt. Tabitha MazzaraOperations Director MBANCa California-based mortgage lender.
“If something happens and the consumer defaults, the first mortgage takes precedence,” Mazzara said. “Therefore, it is a riskier loan for the lender. Credit requirements may be more stringent than those looking for a first mortgage. [primary mortgages] Lenders are in a better position. ”
Due to their higher level of risk, second mortgages tend to have higher interest rates than primary mortgages.
Common Uses of Second Mortgages
Second mortgages have few restrictions. You can use the money you get from your second mortgage for your next expense, but it may not be the best way to cover those expenses.
Home equity loans and HELOCs are most commonly used in home renovationespecially for large retrofit projects that require large up-front investments.
Second mortgages offer favorable interest rates compared to credit cards and personal loans, so they are sometimes used to consolidate high-interest debt.Finance Experts urge caution when transitioning unsecured debt to secured debtIf you can’t pay it back, you risk losing your home.
Type of Second Mortgage
Second mortgages come in two main forms: home equity loans and HELOCs.
home equity loan
“They are typically a lump-sum payment method that allows you to borrow a specific loan amount with a guaranteed interest rate and can be repaid over a set number of years,” says Sarah Catherine Tierrez, certified financial planner and CEO. Aptus Financial“Great for home remodeling projects, debt consolidation, or if you know how much you want to borrow.”
Pros and Cons of Home Equity Loans
Home equity loans have some advantages and disadvantages to keep in mind.
Because home equity loans are collateralized by your home, they usually have lower interest rates than other forms of credit such as personal loans and credit cards. Because the interest rate is fixed, your monthly payments are fixed and predictable. Also, if you use the loan for home renovation, the interest paid on the loan may be tax deductible.
However, home equity loans are only available to those who have established sufficient equity in their home. If you recently purchased a home, you may not be eligible.
Home equity loans offer one amount upfront, so if your planned project costs more than you expected, you may need to find other financing. Home equity loans may also include closing costs which can be 2% to 5% of the loan amount.
A HELOC borrows against home equity, but works very differently than a home equity loan. In lieu of a lump sum cash payment, HELOC offers a revolving line of credit.
HELOC pros and cons
During HELOC lottery period You can use HELOC as many times as you want — for the first 10 years or so. Some HELOCs only pay on interest during the withdrawal period, so your payout can be very low, and you only pay interest on the amount of credit you use.
Unlike home equity loans, HELOCs are usually variable rate (some lenders offer fixed rate HELOCs). For variable interest rates, the interest rate can change over time and your monthly payments can change. For interest-only HELOC borrowers, the payments made during the withdrawal period are interest-only, and the end of the withdrawal period can cause shock. Your payments now include principal and interest and can be significantly higher than before.HELOCs may have additional fees such as annual fees, inactivity fees and early termination fees.
HELOC vs. Home Equity Loans: Which Is Better?
Neither product is necessarily great for everyone, so consider your own expenses and goals.
If your expenses are pressing and you know exactly how much you’ll need (such as ordering a new cabinet or consolidating existing debt), a home equity loan may be a good option. You can receive cash upfront and pay a fixed monthly fee.
If you don’t know your exact costs or want the flexibility to cover unexpected expenses, HELOC may be a better option. A revolving credit line can be used multiple times and you pay interest only on the amount used.
Remember, taking out a second mortgage increases your overall mortgage debt. That can be risky, says Gutierrez.
“What if you get a second mortgage and the house goes down in value?” she says. “What if you want to sell your house? You owe more than it’s worth.”
Before you take out a loan, make sure you can comfortably afford the payments and that you can handle the loss of your assets.
“For many people, now is not the time to incur significant new discretionary costs,” Gutierrez said.
How do I get a second mortgage?
If you are getting a second mortgage and applying for a Home Equity Loan or HELOC, follow these steps:
- Build Equity: Lenders can borrow so many shares, as many lenders set limits to not exceed 80% of available capital.
- Check your credit. Generally, you need good to excellent credit to qualify for a second mortgage. Review your credit report to make sure the information is correct, pay off existing debt, make all payments on time, and credit score.
- Shop for Lenders: Compare offers from multiple banks or credit unions, as interest rates and terms may vary from lender to lender. If possible, request a quote within a limited period of time (such as 15 to 30 days) to minimize credit impact.
- Collect documents. When you apply for a second mortgage, you’ll be asked to provide proof of your income, such as payslips, tax returns, recent mortgage statements, and copies of the homeowner’s insurance policies.
- Submit application: Once you submit your application, the lender will review it and conduct a rigorous credit check. The lender wants to make sure you can handle his two mortgage payments, so they’ll also check your debt-to-income ratio.
that’s it! The lender will inform you of the decision and next steps.
Even if you own your home outright without a mortgage, you can still use your second mortgage to finance major projects. But a home equity loan or his HELOC will be the top priority for repayment.
Second Mortgage Fees and Rates
Second mortgages tend to have higher interest rates than primary mortgages, but may still be cheaper than other forms of credit.
Interest rates on home equity loans have risen this year, along with the Federal Reserve’s Federal Funds rate, which was raised in response to the highest inflation in 40 years. Currently, interest rates average over 7% for both loans and HELOCs.
Additional charges may apply for a second mortgage. For example, you may have to pay a closing cost of 2% to 5% of the loan amount. You may also have to pay early termination fees, annual dues, inactivity fees, or make balloon payments to pay off the loan.
Frequently Asked Questions (FAQ):
Is there a difference between a second mortgage and a home equity loan?
A second mortgage is a loan secured by a home, second only to a primary mortgage. A home equity loan is a type of second mortgage. However, home equity loans are also available if you do not have an existing mortgage.
“You can get a home equity loan or a HELOC whether or not you have a first mortgage,” says Mazzara.
If you own your home outright, you can borrow money using a home equity loan. In that scenario, the home equity loan is the first mortgage.
Is there a difference between a second mortgage and a HELOC?
Similarly, a HELOC may be a kind of second mortgage. It is in his second position on your existing mortgage, so in the case of a foreclosure, it will only be paid after the primary mortgage has been paid in full. If you don’t have a mortgage, you can use your HELOC to access your line of credit, but your HELOC is in the first position.