Second mortgages are very similar to the first mortgage you use to buy your home. The main difference for the second mortgage is, however, the fact that a second mortgage is secured by the assets of your first mortgage and is based on the amount of shares you accrued in your first mortgage.
With second mortgages, the lender, as a result, at a higher risk, such a second mortgage would have a higher interest rate if you were to see with a first mortgage. But a second mortgage offers a fixed schedule with equal and predictable payments, which can make a good option when looking for a significant amount to fund a large project, your child’s education or other emergency expenses.
Often referred to as a lump sum loan, a home loan is drawn up in a similar manner to your first mortgage, but as a second loan after your first mortgage. Closing costs on second mortgage loans will be lower than those for first mortgages. However, home equity loans have fixed rates, which are slightly higher than those on your first mortgage.
A HELOC is a type of credit that your home uses as a form of collateral. Since your home is usually your biggest asset, many people will take a home loan for major purchases such as home improvement, education or medical bills.
With a HELOC, you are offered a particular credit line. In many cases, the limit is taken as a percentage of value for your home, less any outstanding balance on your current mortgage.
Both second mortgages and HELOCs use your home as collateral so it is imperative that you only take out these loans when you are sure of your ability to repay them.
Whatever type of loan you choose, you will often get the opportunity to deduct part of the cost of the repayment when you pay your taxes. Due to the increased closing cost associated with a second mortgage, you will be able to make more detailed deductions, which are worth considering when choosing your new loan.
The best loan for your situation depends on a variety of factors, including your spending habits, credit ratings, and financial requirements. It is often the case that regular payments are better suited for home equity loans, while one-off payments are better for second mortgages. Discuss your options with finance companies to consider which loan is the best choice financially for your situation.