TEAM Metrowest
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Posted by TEAM Metrowest on 9/18/2019

Youíve been paying off your mortgage for 10 years, building equity while making careful financial decisions to ensure that youíre on track to pay off your mortgage. So, all of those payments are essentially money in the bank for you, right?

Not quite. The equity youíve built toward is home isnít really accessible until you either fully pay off the home, sell your home and use your equity toward a down payment, or use it to take out a second mortgage.

In todayís article, weíre going to be talking about second mortgages--what they are, when to use them, and when you should seek out other options. Hopefully, by the end, youíll be able to make a more informed decision.

What is a second mortgage?

A second mortgage is somewhat deceptively named. The process of taking out a second mortgage revolves around using your equity as collateral toward a second loan. That loan amount doesnít have to be used toward a home, however. It can be spent pretty much at the discretion of the homeowner, as long as you stay within the spending limits of the loan terms.

Why take out a second mortgage?

Homeowners typically take out a second mortgage when an expense is tossed their way, whether foreseen or unforeseen. It could be a costly house or vehicle repair, a childís education, or any other large expense that you might not have been aptly prepared for.

Types of second mortgages

There are two main types of second mortgages that homeowners qualify for. First is a standard home equity loan. You receive a fixed-rate loan that usually paid off over a loan term of 15 or 30 years.

The other type of second mortgage is a home equity line of credit (HELOC, for short). A HELOC is similar to a credit card in that you are approved for a certain amount but donít need to spend the full amount.

Risks of home equity lines of credit

This type of loan is ideal for expenses that you maybe donít know the full cost of. However, there is an inherent risk in taking on an expense that might go over the credit limit of your HELOC.

Just like with credit cards, interest rates vary. However, the interest rate is linked to something called a ďbenchmark rate.Ē When interest rates for the benchmark increase, so do your HELOC rates.

Aside from the variable interest rates, HELOCs can also prove to be difficult to manage for people who are already in credit card debt. So, itís only recommended that you take out a HELOC if you are sure that you can stay on top of your monthly payments and are in good standing with other credit lenders.

Risks of home equity loans

Standard home equity loans arenít without their own risks. For one, youíre putting your house on the line when you take out a second mortgage. So, before taking out a home equity loan on a new expense, be sure that you can manage that expense or you could risk losing your home.

Having a second mortgage can also make it difficult to refinance your home loan, which could cost you in the long run if it would otherwise pay off to refinance.

Benefits of second mortgages

Second mortgages do have their time and place. Home equity loans, for example, can help you achieve a lower interest rate than a typical loan if you have a great deal of equity built in your home. This could make the most financial sense over the long term.

Similarly, a HELOC might be a better option than a credit card for homeowners who donít have a credit score high enough to land them a good interest rate.





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