Benefits of Second Mortgages

Let’s first have a look at the second mortgage loan option. As the name implies it is very similar to the first mortgage loan in that you are using your home as a form of security in order to obtain a loan. As with the first mortgage loan you have the option to have your interest rates set at a fixed rate or a flexible rate and depending on your agreement with the lender either arrangement can be beneficial or not.

The difference is that instead of using your entire house as a form of security which the first mortgage does, the second mortgage uses any extra equity that is left to form the security of the loan. What this means is that any extra value or the difference between the actual value of the house and what is owed on it can be used as security. You are taking up the slack in the equity of you house and making use of it to secure your next loan.

When dealing with second mortgage rates the most important factor in the equation is the interest rates that will be charged. The base rate that will be charged is different and is often times higher than the first mortgage loan because of the associated risk in taking out a second loan on an asset that is already used as a collateral on another loan product. Those that suffer from bad credit histories have an even tougher time as they will be charged with a bad credit loan rate which is often times very high as it is.

Most of the time it is worthwhile to consider the use of variable rate second mortgage loans if you have a bad credit history. This is because having a fixed rate second mortgage loan can be extremely expensive. The variable options will normally work out cheaper although it is a higher risk proposition for you. Any changes that the Federal Reserve makes on the interest rates will have a direct affect on you meaning you must set aside enough cash every month not just to meet the required payments but also to anticipate any movements in interest rates.

The second option that we would like to explore is the use of Home Equity Lines of Credit arrangements (HELOC). A HELOC arrangement really isn’t a loan but rather a line of credit arrangement. The principles of it are that the lender will set aside money up to the value of any spare equity that you have in your home. You will have the right to draw up to the specified amount and use the money for whatever purposes you desire. You will only be charged for the amount of money that you draw so it is quite a prudent arrangement if you do not intend to draw a lot. If however you decide to use a lot of the credit then it can prove to be more expensive than a normal second mortgage loan.

In other words a HELOC arrangement is quite similar to a credit card in that you are given a line of credit and only charged for whatever amount that you have used over the past month. With a HELOC arrangement whatever amount that you have paid pack to settle can be re-drawn again. The duration of these contracts can be anywhere from 10-30 years depending on the contract signed by the lender.

The main problem with a HELOC arrangement is that the interest rates that are charged are much higher than a second mortgage loan. If you were to draw the same amount on a HELOC arrangement as a second mortgage loan you would be likely to pay more than double the interest because of how the interest structure is setup. Naturally when considering the different financial products the most important figure to understand is the annual interest rate. It determines how expensive the loan will be to you. This is particularly true for those who have chosen a variable interest arrangement with the second mortgage loan. You will be exposed to the fluctuation of the Federal Reserve interest rates and thus higher risk. A simple 10 points movement may mean that you have to pay hundreds more a month.

Let us now go into the important details of how you can decide if you want a fixed interest rate loan or a variable interest rate loan. Without going into the specifics of economics you should apply for a variable interest rate loan when the current interest rates environment is low. This means that you will get to enjoy the current low rates and have a minimal chance of the interest rates getting to a dangerous point. Conversely, if the interest rate environment is currently high then it will make more sense for you to go for the fixed interest route. It should be noted that most loans have their interest rates calculated early on the life cycle. This means for a loan that takes 20 years to pay off the bulk of the interest rates are calculated in the first 3 years, not many people know that. This is to ensure that the bank gets a healthy profit even if the borrower tries to pay off the loan early. Because of this arrangement it also makes sense that you should pick current environment with the lowest interest so you can make use of that.

It’s needless to say that shopping around for lenders before getting your loan is a very smart thing to do. The problem is that once a borrower settles for a lender they seem to think that it is a breach of contract to change lenders. Remember that the shopping around should never stop even after you have a loan. There really is no point in being faithful to your lender when t is obvious that if you become insolvent they wouldn’t think twice about coming after you with their hatchets. Business is business. Always look for refinancing opportunities but keep in mind the cost of it and how much the whole exercise will cost you. Only if the rates are sufficiently lowered can you opt to refinance your loan.

When trying to decide which product to use you have to ask yourself some serious questions about the reason for the loan. The two products although being rather similar in how they are secured using your home equity should be used quite differently. A second mortgage loan should be used if you need to buy something big in one shot. A HELOC arrangement should be used when you need money to be available but not necessarily use it all at once. Decide what you need for the long term and get the product that suits the requirement correctly.