Generally, there are a couple of kinds of second mortgages: home equity lines of credit, and the more classic home equity mortgage loan. Selecting between these types of mortgages depends on the requirements of the homeowner or buyer.
The home equity line of credit (HELOC) commonly has a shorter term that can be drawn upon such as a bank card. Checks are drafted against a home equity credit line in an effort to pay for unpredicted costs. Interest payments are made monthly when there is a balance outstanding. Second mortgage rates for home equity lines of credit are based on short term rates, which makes them typically lower than the first mortgage loan rate. The risk with a home equity line of credit is that the whole balance is due at maturity. Running up the balance due on a home equity line of credit increases the risk of higher rates at refinance, or the possibility that the line of credit may not be renewed whatsoever. There is considerable rivalry among mortgage companies for these mortgages, which lessens this risk to some degree.
The more common second mortgage loan is the home equity loan. Home equity loans are fixed-rate loans over a longer term than home equity credit lines. Because the rate is set, the interest is usually higher than that of a first mortgage. The advantage of the home equity mortgage is the fact that it amortizes to a zero balance over the period of the mortgage. Therefore, there is no refinance risk.
There are numerous uses for second mortgages. A traditional home equity mortgage loan is often used for home improvement tasks that can add worth to a home. Nevertheless, the use of them is often not restricted. Many property owners use these loans to combine other bills simply because the rate of interest, though higher than 1st home mortgage loans, is generally lower than higher-interest personal debt like bank cards. Many property buyers with limited capital available for an initial investment (down payment) may use a second loan rather than private mortgage insurance. This is often referred to as an 80/20 loan arrangement, because the first mortgage loan represents eighty percent of the acquisition cost with one of these second mortgages making up the rest.