Second Mortgages and Home Equity Loans
Are you considering a remortgage on your current home loan? Have you explored all the available options for this type of loan? Depending upon what you want to use the money for, there are a number of options available for utilising your home’s equity. Second mortgages and home equity loans are two options for doing so. This article will explore each of these to help you decide which one is the best mortgage option for your financial needs.
Second Mortgages
A second mortgage is a secured loan considered subordinate, or second, to an existing loan on your property. Secured loans are those backed by some form of collateral, in this case it’s a house or other property. A second mortgage, therefore, would be a secured loan upon your property. It is in addition to the original mortgage: the one you initially purchased the property with.
Second mortgages are possible, and utilized, mostly when a property has some equity. The owner of the property can tap into this equity by taking a second mortgage based upon the amount of equity. For example, if the original mortgage for a detached house (the purchase price) was £240,000, and three years later it’s value is £270,000, the house now has gained £30,000 in equity. A second mortgage could be taken upon the property for that additional £30,000, giving the homeowner the financial means necessary to do whatever he wanted: home improvement, consolidate bills, etc.
When there are two mortgages on a given property, and one is fallen into default, the primary loan will be repaid first no matter what. That is why the second mortgage is considered subordinate. If the homeowner defaults on a mortgage, and the house is sold, the first mortgage will always be paid off. If there is any money left over, the second mortgage will be paid from it. In severe circumstances however, a secured lender has the ability to pursue repayment based on the collateral, in this case your home, if negligence to repay the amount borrowed occurs.
But, because the second mortgage is a subordinate loan to the primary mortgage, second mortgages are always at a higher risk of not being paid. This risk is always translated into higher interest rates by the lender. Therefore, a second mortgage is guaranteed to carry a higher interest rate: sometimes twice even three times greater than the interest rate of the primary mortgage.
Home Equity Loans
Home equity loans are virtually synonymous with second mortgages. It is a loan secured by the equity in the home, meaning the home is offered as collateral. Home equity loans and second mortgages are virtually the same to financial lending institutions. The difference usually to the borrower is that the home equity loan can be a line of credit. Instead of one lump sum loan, the home owner who opts for a home equity loan or line of credit can continually borrow upon it the same way you would charge a credit card. Again, the difference is that the home equity line of credit is guaranteed by the house or property, and if the loan is defaulted upon you could lose this asset.
Home equity loans, and second mortgages, are generally given for shorter periods of time than a traditional, primary home mortgage loan. In other words, the repayment period of the loan is shorter. They also can carry fixed or adjustable interest rates. However, knowing the facts about second mortgages and home equity loans before borrowing will help you to better decide which mortgage is the best mortgage for utilizing your home’s additional equity.
Published on September 19, 2007
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