If you have a 2nd mortgage on your home, you are one of the millions of people in a very large pool. In the “old days” a person with a second mortgage was considered financially unstable. Fortunately that perception has disappeared.
The reason you have a 2nd mortgage depends on your circumstances at the time you utilized your right to borrow against your property. Let’s say however your circumstances have changed and you want to lower your payments or get a mortgage more in tune with your current needs.
As with all mortgages, shop around. Look at the rates quoted in your local paper, by your bank and/or credit union and on the Internet. Once you find a rate you think is right for you, look at the terms and conditions of that particular loan program. Those things called terms and conditions are the things that cause the problems.
For example, you may wish to have a traditional second mortgage. That is one under which you can borrow up to a certain percentage of your equity with the payments a certain amount for a certain period of time.
Generally speaking, second mortgages will be for 15 or 20 years and the monthly payment will be amortized over that time frame. This means at the end of the time period, you will have paid the mortgage in full.
Sometimes though, this traditional mortgage is adulterated in some manner. The payment period may be calculated on a 30 year basis rather than the 15 or 20 year term noted in the mortgage document.
This means your payments will not pay the mortgage in full during the 15 or 20 year term. The principal balance remaining will have to be paid in a balloon payment in order for the mortgage to be considered paid in full.
As an example, consider a $20,000 second mortgage that is amortized to pay only $15,000 of the $20,000. That means $5,000 will be due and payable at the end of the term. You will have to pay the $5,000 or get a loan for that amount.
This is an excellent example of why you have to understand the terms and conditions of the loan. A balloon payment is one way to keep payments low but it is another thing to have to come up with the money to pay one.
Another loan that is not a second mortgage in the true sense of the term is a home equity line of credit loan. It is referred to as a HELOC.
Like a true second mortgage, it sets a maximum loan amount on the sum total of the first and the second loan. Generally this amount is between 75% and 85% of the appraised value of the property.
It differs from a true second in that it is an open-ended line of credit that you can draw money against at any time. This type of loan usually carries an application fee and an annual fee. You also are not charged any other fees or interest against the loan until you use it.
For example, if you have a HELOC for $100,000 but only borrow $10,000 against it, you will be charged interest on only the $10,000 you borrowed and not the whole amount. This makes it easier for people to get the exact amount of money they want or need and not have to over borrow.
The commonality in all second mortgages is the same as it is in first mortgages. Understand the terms and conditions of the loan. If you don’t know or aren’t sure about a point, ask questions until you are satisfied with the answer.