How do second mortgages work?
More commonly known as a home-equity loan, a second mortgage is a type of secured loan that you take out on your property using the equity it has. The amount of money you will be allowed to borrow is based on the market value of your property minus your balance from the first mortgage. For example, if you own property that has a market value of $100,000 with a balance of $40,000, then you have a $60,000 equity credit line. You would then be allowed to borrow up to that much for your second mortgage.
Why make use of your equity?
There are times when you may need money in order to pay for certain things. Making improvements in your home and purchasing new appliances are just some of the more common reasons. A second mortgage might be more beneficial to you financially than using conventional credit cards because the interest rates on home-equity loans are much lower. This is due to the fact that it is a secured loan. In certain circumstances, it might even be possible to have the interest you pay in a second mortgage become tax deductible.
Two Types of Home-equity Loans
There are two types of loans you can choose from if you are a property owner looking to get a home-equity loan, open-end loans and closed-end loans.
With a closed end loan, the borrower will receive one lump sum up to 100% of the value of the property, minus any liens. If you choose this type of loan, you would not be able to borrow anymore after that first initial payoff.
An open-end loan revolves. This means you will be able to choose when and how often you want to borrow. You will also be able to borrow up to 100% of the value of your property, minus any liens.
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