Second
Mortgages
Home Equity
Credit Line
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.
2nd Mortgage
Term
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.
|
