Otherwise known as home equity loan, this is a form of subordinate mortgage created while the original mortgage is still in force. With a second mortgage, you can use a property, typically your house, as a collateral. So in the event of a default, the original mortgage will receive all earnings from the property’s liquidation until it is completely paid off. However, when the required payments are completed, the second mortgage will only receive repayments. This is due to a fact that the interest rates for the home equity loan may turn out to be higher and the amount loaned to be lower than the initial mortgage.
How Does Equity Change?
Second mortgages are also called HELOCs or Home Equity Lines of Credit. This allows you to use your assets for other goals and projects without even putting your property on the market.
Since you are tapping into the value of your home in relation to any loan balances, your equity may increase or decrease. However, ideally this should grow over time. Here are some ways that this might change:
1. By making monthly loan payments, you get to lower your loan balance thus increasing your equity.
2. Meanwhile, if your property increases value because of improvements or a competitive real estate market, your equity may potentially increase.
3. Nonetheless, you will lose equity when you borrow against your property or when it loses value due to many reasons.
What are the Various Forms of Second Mortgages?
There are various forms of home equity loans, these are:
Lump sum – This is a standard, one-time loan that offers a lump sum of money for whatever purpose you have in mind. With this type, you can repay over time through regular monthly amortizations.
Line of credit – You can also borrow money through the use of your line of credit. This may never require you to take any money though, but you still have the option if you want to. The lender, however, decides your maximum borrowing limit. This enables you to borrow multiple times until you reach that limit.
Rate choices – Depending on the loan type and your preferences, you can borrow money with a fixed interest rate. Especially if you are loaning a huge sum, this allows you to make a payment plan for the years to come.