Thursday, October 6, 2011

Can a second mortgage loan serve your purpose?

Do you want money to clear your debts or finance your child’s education or serve some other purposes?  Then a second mortgage loan can be the answer. Before you apply for it, you must make sure you have adequate funds to repay the loan; otherwise you may lose your home to a forced foreclosure.


There's basically two types of second mortgage loans - a closed end traditional home equity loan, or a a "home equity line of credit" which is an open end credit much like a bankline.

1. Home equity loan:

You can apply for a home equity loan by filling out an application form available online. To take out a home equity loan, you have to keep your existing home as a security. You can even use your non-residential property as a security for the approval of the loan if you are a licensed title holder and your land is free from legal dispute. You will get around (60-65) % of the actual value of your property used as security against the loan at a fixed rate of interest. However, you should check out the pros and cons before you apply for a home equity loan.
 
Benefits of a home equity loan:
  • If you take out a home equity loan, you can pay off your credit card bills by consolidating all your debts into one monthly payment.
  • The interest rates of a home equity loan will be lower than the interest charged on your credit cards.
  • The interest that you pay towards the home equity loan is tax-deductible and therefore you can easily save a substantial amount of money on your taxes.  
Drawbacks of a home equity loan:
  • If you use the loan amount to invest on certain items that immediately depreciates, then you may have to face financial crisis in the near future.
  • If you’re unable to pay off your loan then the lender will foreclose your property used as collateral.
2. Home equity line of credit:
 
Like a home equity loan, here also you have to keep your home as security to take out a home equity line of credit. You will get this loan in the form of a credit card or a set of blank checks with a certain limit depending on your home equity. The more you pay down the balance, the more funds will become available to use in the future. A HELOC consists of both advantage and disadvantages:
 
Pros:
  • Here, you don’t have to borrow the amount in a lump sum, rather you can withdraw the funds according to your needs.
  • The interest rate of this loan is variable and is lower than the interest rate charged by most mortgage lenders.
  • If your credit score is good, then you don’t have to pay a closing cost.
  • At least for now, interest on an home equity line of credit is tax deductible. 
 Cons:
  • According to the terms of this loan, you may have to withdraw a limited fund each time within a stipulated period of time.
  • The cost of securing a HELOC can be high. You may have to pay a property appraisal fee, an application fee, closing costs and other possible charges that are included in your loan agreement. You may also have to pay the transaction fee every time you withdraw the money.  Most of these requirements are based on your credit and relationship with your bank.
  • It's not easy to find the self-discipline to pay off a line of credit for many folks.
Opting for a second mortgage loan can be a useful strategy if you’re disciplined enough to use the funds for a dedicated purpose and are able to repay your loan on time. It can be the answer to investing in a resort vacation property or beach condos that banks will no longer finance.

Ask a Realtor or your own banker for more information on second mortgage loans.
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