Types of Second Mortgage Home Loans
There are two major types of second mortgage home loans, or equity
loans. There is the fixed-rate, fully amortized loan with fixed
monthly payments with all loan proceeds paid to you at the time
of your loan closing – and there is the revolving equity
line of credit, with a variable interest rate and you choose how
much you borrow at any time, up to an approved limit.
The type of loan that is right for you depends upon several factors.
It depends on how much cash you need at one time and on how long
you plan to use the cash.
If you need a large block of cash all at once, say for an investment,
then the fixed-rate loan, wherein all loan proceeds are paid in
a lump sum, would be right for you. With the fixed-rate loan your
loan is fully amortized for 10 years, 15 years, or in some cases
20 years, with interest and principal payments that remain constant
for the life of the loan. This type of loan gives you a great
deal of stability and allows for simple long-term planning.
The equity line of credit works somewhat like a credit card.
Your lender approves you for a maximum amount that you can borrow
and you borrow as much or as little as you like at any time by
writing special checks. Like a credit card you only pay interest
on the amount that you have actually borrowed (as opposed to on
the entire balance that you have been approved to borrow.) As
you pay off your loans, the money then becomes available to borrow
once again.
The interest rate on an equity line of credit is variable. Combining
the variable interest rate with the fact that the total amount
you borrow can fluctuate from month to month means there is little
or no stability in your monthly payments. Keep in mind, too, that
there are often fees built into equity lines of credit that increase
your monthly cost above what it might first appear to be.
The kind of second mortgage home loan that’s right for
you depends to some extent on your credit worthiness as well as
on the amount of equity which you have in your home, as well as
on how and when you plan to use the money you are approved to
borrow – but the choice is yours.
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