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Second Mortgage Loan: The Basics of Home Equity Loans

If you are considering tapping your home equity for any reason, there are several loan options available to you. These options include home equity lines of credit, second mortgage loans, and cash out refinancing. Each type of home equity loan has advantages and disadvantages; the home equity loan option you should choose depends on your financial situation.

The type of home equity loan you choose will determine the type of interest rate you will receive along with the finance charges you will pay. Your mortgage lender may require you to have an appraisal prior to applying for your second mortgage; this appraisal is used to determine how much equity you have in your home. Equity in your name is the difference between what you owe on your current mortgage and the appraised value of your home.

The amount of equity you have in your home determines how much you can borrow. The interest rate you will receive depends on your credit score, loan-to-value ratio, and the type of loan you choose. When shopping for a home equity loan it pays to compare multiple loan offers to find a loan with the lowest interest rate and fees.

Second mortgage loans typically come with fixed interest rates; this is an advantage over home equity lines of credit. Before taking out a second mortgage you should plan your budget to make sure you can afford the monthly payment in addition to your primary mortgage, car payment, credit cards, and household expense. Remember that your second mortgage is secured by your home just like your primary mortgage. If you default on either loan the lender can take your home.

Many homeowners use second mortgages to consolidate other high interest debt such as credit cards and student loans. Consolidating multiple debts into one payment can ease your cash flow and do wonders for your budget. Consolidating does not eliminate debt, it simply shuffles it around to make it easier to repay. If you don’t change your spending habits you may find yourself further in debt.

You can learn more about your home equity options including common mistakes to avoid by registering for a free mortgage guidebook: “Five Things You Need to Know About Your Mortgage.”

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