Second
Mortgages
Home Equity Credit Lines
If you need to
borrow money, home equity lines may be one useful source of credit. Initially
at least, they may provide you with large amounts of cash at relatively low
interest rates and they may provide you with certain tax advantages unavailable
with other kinds of loans. (Check with your tax advisor for details.) At the
same time, home equity lines of credit require you to use your home as
collateral for the loan. This may put your home at risk if you are late or
cannot make your monthly payments. Those loans with a large final (balloon)
payment may lead you to borrow more money to pay off this debt, or they may put
your home in jeopardy if you cannot qualify for refinancing. If you sell your
home, most plans require you to pay off your credit line at that time. In
addition, because home equity loans give you relatively easy access to cash,
you might find you borrow money more freely. Remember too, there are other ways
to borrow money from a lending institution. For example, you may want to
explore second mortgage installment loans. Although these plans also place an
additional mortgage on your home, second mortgage money usually is loaned in a
lump sum, rather than in a series of advances made available by writing checks
on an account. Also, second mortgages usually have fixed interest rates and
fixed payment amounts. You also may want to explore borrowing from credit lines
that do not use your home as collateral. These are available with your credit
cards or with unsecured credit lines that let you write checks as you need the
money. In addition, you may want to ask about loans for specific items, such as
cars or tuition.
Length Of Second Mortgage
Some second
mortgage loans may extend for as long as 15 or 20 years; others may require
repayment in one year. You will need to discuss the repayment terms with the
individual mortgage company and select one that offers terms that best suit
your needs. For example, if you need to borrow $20,000 to make repairs on your
home, you may not want a loan that requires you to repay the entire amount in
one or two years because the monthly payments may be too high.
Payment Calculations
Be sure you
understand how much your monthly payments will be and what they cover. Your
mortgage company should be able to give you this information in advance. With
some loans, you will be required to make monthly payments on the principal and
interest. With other loans, you may be required to pay interest only on the
borrowed amount. With these loans, your monthly payments will not reduce the
principal amount of the loan. With such a loan, you will be required to pay
back the entire borrowed amount at the end of the loan period. These loans are
popularly known as "balloon loans." If your loan has a balloon payment, you
should consider how you will arrange to repay the entire amount when it becomes
due. On "home equity lines," the mortgage company does not have to give you the
exact amount of the monthly payment, but must explain how it is figured. This
is because the borrowed amount will vary and your outstanding balance will
change if you use the line of credit. However, if your monthly payment term is
5% of the outstanding balance and your outstanding balance is $5,000, your
minimum monthly payments would be $250.
Loan Costs
Many companies will charge a
fee for lending you money. The fee is usually a percentage of the loan and is
sometimes referred to as "points." One point is equal to one percent of the
amount you borrow. For example, if you were to borrow $10,000 with a fee of
eight points, you would pay $800 in "points." The number of points mortgage
companies charge varies, so it may be worthwhile to shop around. If the fee
seems too high, you may be able to bargain for or find a lower fee. Be sure to
get the amount of the fee in writing before you take the loan. Many states
limit the amount of fees a mortgage company may charge on a second mortgage
loan. You may want to check with your state's consumer protection office or
banking commissioner to determine whether there is a limit in your state.
Interest Rates
If you have a fixed-rate
loan, the interest rate is set for the life of the loan. However, many
companies offer variable rate mortgages, also known as adjustable rate
mortgages or ARMs. These provide for periodic interest-rate adjustments. If
your loan contract allows the mortgage company to adjust or change the interest
rate, be sure you understand when the company has the right to change the
interest rate, whether there are any limits on how much the interest or
payments can change, and how often the company can change the rate. You also
should know what basis the company will use to determine a new rate of
interest. |
