As in first mortgages, there are a wide variety of programs to fit most every credit need. If you have perfect credit, there are many programs out there that will loan you up to 125% of your equity. Yes, this means that even if you have no equity, you can get a second mortgage. However, also as in first mortgages, the worse your credit is, the higher the interest rates are and also the less you can borrow against your equity. For instance, if you have less than perfect credit, a lender may only be willing to loan you up to 80% Loan-to-Value (LTV). For instance, let's say you have a $200,000 house and the lender is only willing to loan up to 80% LTV due to your credit. You owe $125,000 on the house:$200,000 x 80%/100 = $160,000 Therefore since you owe $125,000 on the home, you will be able to get a second mortgage for $35,000. (Of course, your interest rate may be 11%, but hey, that's beside the point).
Many people looking to borrow money often opt for home equity line of credit, or HELOCs, for short. They are a tempting first choice, because they can often give you the much needed cash at a low interest rate. Another advantage to taking out an HELOC, or a home equity line of credit, is that they may provide the borrower with a certain tax break, but you would need to verify this with your lender or accountant.
One drawback to HELOCs, however, is the fact that borrowers are expected to put their homes up as collateral. So, it is important that you think this decision through, before finalizing the loan, because you may be at risk of losing your home- and its equity- if you are late or cannot make your monthly payments. Finally, if you decide to sell your home, must HELOCs will require that you pay off the balance, before completing the sale.
You can also take out a second mortgage, if you need some cash. Like the HELOC, second mortgages usually pay out the loan in one sum, which makes it a convenient option. Second mortgages also have the added advantage of having set payments, at a fixed interest rate. Many companies will charge a lending fee, which will vary from company to company. These fees are usually based upon a percentage of the loan and are frequently referred to as 'points.' If one fee seems too high, don't be afraid to shop around to find one which is better suited to your budget. Remember, however, that adding a second mortgage to your home carries with it certain risks. Like with home equity lines of credit, you could lose your home, if you fall behind in the payments. Home Equity Credit Line of Credit (HELOC)
If you need to borrow money, home equity lines may be one useful source of credit. Initially at least, they may provide you with large amounts of cash at relatively low interest rates and they may provide you with certain tax advantages unavailable with other kinds of loans.
