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Debt
Consolidation: Second Mortgage Options
If you are a homeowner and you realize that
your spending may have gotten away from you, there are still
ways to pay off all your bills without having to take drastic
steps, such as applying for a debt management plan with a third
party. As a matter of fact, your biggest asset will also be
your biggest help in getting a handle on your debt – via a
second mortgage!
It
is important to remember that not all second mortgages are
created equal, but instead there are distinct differences
that may affect your ability to pay off debt differently.
In addition
to the foregoing, you will need to keep in mind your financial
acumen – are you able to stay out of debt once you paid off
all your bills, or are you likely to run up your credit cards
again? Whatever loan product you may choose, there are distinctly
different second mortgages options when consolidating debt
and you will need to find out which loan product is appropriate
for you.
Generally speaking, second
mortgages are shorter than your first mortgage. While a first mortgage is commonly 30 years
long, a second mortgage may run anywhere from ten to 20 years.
Yet even though the duration of time is shorter than your first
mortgage, the interest rate is usually higher, even though
you will also be able to get adjustable rate mortgages. Last
but not least, it is important to keep in mind that a second
mortgage ties up a portion of your home’s equity. Thus, if
you wish to sell your home at some point during the repayment
process, the first and your second mortgage both need to be
paid off before you will be able to benefit from any increase
in your real property’s value. No matter which second mortgage
option you choose, the amount you can borrow is dictated by
the available equity in your home, in other words, the amount
of equity you have above and beyond the amount financed by
your first mortgage.
The Home Equity Loan
The home equity loan is the most common loan product you will
encounter when shopping around for a second mortgage. Relying
solely on your increase in equity, this loan taps into the
increased value your home has now. You will receive a lump
sum payment, and the number of payments is fixed. You will
pay if off just like you are paying off your first mortgage.
You may run into higher closing costs than you experienced
for your first mortgage, and your interest rate will also be
higher. This is a great loan option for someone who wants to
get rid of a bunch of debt and then have a specified monthly
amount to pay back. There is no guessing involved, and you
can set up an iron-clad budget.
The Home Equity Line of Credit
A bit less traditional, the home equity line of credit is
gaining in popularity over the last few years. As opposed to
a home equity loan, a line of credit allows you to decide how
much money you want to draw from your equity. Usually the ceiling
of the loan is fixed, meaning that you cannot take out more
than a specified amount. Yet as you pay down the amount of
the money taken out, you will be able to draw more money. Draws
usually have to be done in specified increments, such as $5,000
or more. The interest rate is usually adjustable, which is
great when the interest rates are low, but which will increase
your payments perhaps beyond your means when the interest rates
jump. While the line of credit is set for a certain period
of time, you will need to repay the loan when the time is up.
This is a good product if you have some debts you want to pay
off, but if you also think that maybe some other things might
crop up in the near future, such as your child’s educational
needs or some home improvements you want to make that will
require ready cash.
A Traditional Second Mortgage
This option may have been considered traditional at one point,
but it is rarely thought of anymore, especially when consolidating
debts. In this scenario the lender will give you a second mortgage
that is above and beyond the available equity. This kind of
loan should be chosen only with extreme caution, because depending
on the real estate market in your area, you may end up being
upside down in your home, meaning you are owing more on it
than it is actually worth, which in turn may inhibit your ability
to sell it.
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: 2007
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