Second mortgage types and the pros and cons of equity loans
If you are in need of emergency cash and have enough home equity
, then you can use it to take out a second mortgage loan. It is a better alternative to obtaining a personal loan or charging your credit card for the required amount. Read on to know about types of second mortgage loans along with gathering knowledge about the pros and cons of taking out such loans.
Second mortgage - What are the types?
Second mortgage is of 2 types that are discussed below.
1. Home equity loan It is a one-time loan that you can take out by pledging your home equity. Usually, you need to make monthly payments on a fixed interest rate and pay it back over a fixed amount of time.
For example, say the present value of your home is $300,000 and you have equity worth $60,000 (down payment). The current balance is $(300,000 60,000) = $240,000. After 10 years, suppose you've paid back $30,000 and the house has appreciated to 350,000. At this time, your home equity is ${350,000 - (60,000 + 30,000)} = $260,000. So, you can take out a home equity loan worth of $260,000.
2. HELOC -Home Equity Line of Credit is a type of second mortgage that you can take out against your present home equity. You actually open an equity account and borrow money as and when required. It functions similar to a credit account. You continue borrowing and paying back from time to time. However, you cannot borrow more than the specified credit limit.
For example, suppose your specified line of credit is $12,000. You borrow an amount of $10,000 to consolidate your credit card bills. You'll not be able to borrow more than $2000 for any other purpose. What you can do is repay a certain amount (say about $5000) so that you have $7000 as your available credit limit.
Second mortgage - What are its pros and cons?
Here are the pros and cons of taking out a second mortgage loan.
Pros:
* Low interest rate - The interest rate on a second mortgage is relatively lower than that of credit cards and other unsecured loans.
* Tax deductible- The interest paid on a second mortgage is usually tax deductible to a certain extent.
* Easy access to cash - You can take out a
home equity loan or a line of credit and make home improvements that help to increase the home value.
Cons:
* Upside-down situation - If your home doesn't appreciate in value, then you may be upside down that is, the outstanding balance on your mortgage loan is more than what the property is worth of.
* Variable interest rates - HELOCs have variable rate of interest; that is, the interest rate keeps on fluctuating from time to time. So, the monthly payments can rise or fall as per the current market rate.
* May lose home - When you take out a second mortgage, you actually put your house at risk. If you're not able to pay back the loan on time, then the lender may foreclose the property and try to get back the loan amount.
It is advisable that you assess your financial condition before taking out a home equity loan or a HELOC. By evaluating your financial condition, you'll become confident that you'll be able to make on-time payments and pay back the loan within the stipulated time period.
Second mortgage types and the pros and cons of equity loans
By: Jessica Bennet
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