Using 2nd Mortgages to Tap Into Your Home Equity
By Joy BreilingMortgage Credit Problems Columnist
If you are like most Americans, your home is the most expensive purchase you will make. With so much of your financial capital wrapped up in one asset, it is important to understand how your home can assist you in reaching your economic goals. A home equity mortgage is one avenue you may want to explore in using your home to improve your future. For example, your home equity may help you get out from under high interest credit card and other consumer debt. Even if you have bad credit, you may be able to use debt consolidation home equity loans to help improve your finances.
What is a Home Equity Mortgage?
When you purchased your home, you probably used your down payment and a first mortgage to finance your purchase. One way of accessing the built up equity in your home is by adding a second mortgage to your property. A second or home equity mortgage is secured by a lien on your home that is placed behind the first mortgage lien. It is referred to as a second mortgage because in the event of a default, the holder of the first mortgage gets paid before the holder of a second mortgage. This added risk to the lender means that rates on second mortgages are generally higher than for first mortgages. Two main types of 2nd home equity mortgage loan programs are the Home Equity Line of Credit (HELOC) and the Home Equity Loan (HELOAN).
Home Equity Line of Credit vs. Home Equity Loan
A Home Equity Line of Credit (HELOC) can best be compared to a credit card. You are approved for a line of credit that you can draw on and repay as needed. Typically, you have unlimited access to the funds during a "draw" period (generally 5-10 years). Then, the loan moves into a repayment phase and you can no longer take money out. Your payments will depend on the balance and the rate, which is variable and based on the current prime rate.
In contrast, the Home Equity Loan is dispersed as a lump sum at the beginning of your loan term and you make fixed monthly payments amortized over the term of the loan. You cannot repay and reuse the home equity loan unless you refinance again and get a new 2nd mortgage. However, the home equity loan is a fixed rate second mortgage and not subject to the volatility of current interest rates.
Using a Home Equity Line or Loan to Improve Your Credit
A second mortgage can be used for a variety of purposes. Generally, HELOCs are most appropriate when you will be taking money out over an extended period of time, for example for a series of home improvement projects or annual college tuition. Fixed home equity loans work best when a lump sum is needed, such as for debt consolidation or an expensive medical procedure.
As with all loan programs, take the time to do your research and contact a trusted lender. Your lender will be able to work with you to insure your mortgage choices fit in with your overall investment plan.
About the Author
Joy Breiling has been employed with the mortgage industry since early 1997. During her career, Joy has fulfilled many positions within the industry including Operations Manager of a large Bay Area broker office. She is currently licensed with the California Department of Real Estate and is an active mortgage originator.
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