When discussing home-mortgage financing, consumers will often hear the terms "first" and "second" mortgages. A first mortgage loan generally refers to the main mortgage on the property, which often represents up to eighty percent of the value. A second mortgage is usually additional financing, which can be put in place for various reasons.
Generally, there are a couple of types of second mortgages: home equity credit lines, and the more traditional home equity mortgage. Selecting between these kinds of home loans depends on the requirements of the home owner or buyer.
A home equity line of credit (HELOC) typically has a shorter term allowing it to be drawn upon similar to a bank card. Checks are written against a home equity credit line as a way to pay for unpredicted costs. Interest payments are made monthly should there be an outstanding balance. Second mortgage rates for equity credit lines are based upon short-term rates, and are usually lower than the first mortgage rate. The danger with a home equity credit line is the fact that the complete balance is payable at maturity. Running up the balance due on an equity credit line for the home increases the danger of considerably higher rates at refinance, or the chance that the line of credit might not be renewed at all. There is significant rivalry among loan companies for these mortgage loans, which diminishes this risk to some degree.
The more classic second mortgage loan is the home equity loan. Home equity mortgage loans are fixed-rate loans over a more prolonged term than equity credit lines. Since the rate is set, the rate of interest is generally higher than that of a first mortgage. The advantage of the equity mortgage is the fact that it amortizes to a zero balance over the life of the mortgage. Therefore, there is no refinance risk.
There are numerous uses for 2nd mortgage home loans. A traditional home equity mortgage loan is frequently used for do-it-yourself tasks that can add value to your house. However, their use is usually not limited. Some homeowners use them to combine other debts because the interest, though higher than first mortgages, is often lower than higher-interest consumer debt like charge cards. Many house buyers with limited finances available for an initial investment (down payment) may use a 2nd loan instead of private mortgage insurance. Oftentimes this is referred to as an 80/20 loan, because the first mortgage loan represents 80% of the acquisition cost with the 2nd home loan bridging the remainder.