Bad days suck. So do weeds. And what about poorly designed, cramped kitchens? If any of this sounds familiar don’t worry, your favorite Madison area credit union has you covered with a great solution – a home equity line of credit! Your biggest asset – your home – can provide you with the funds needed for: “chillin’ on Lake Monona” new boat, a “make your neighbors jealous” landscaping overhaul; or even a “cooking in style” kitchen remodel.
What exactly is a home equity line of credit or second mortgage?
Generally speaking the term “second mortgage” describes any loan secured by the equity in your home in addition to the primary mortgage you originally secured to purchase it. The most common examples include a home equity loan or a home equity line of credit.
A second mortgage is similar to the first mortgage a homebuyer would take out to purchase a home, except this is “second in line” should the borrower default and the lender needs to be repaid. With that in mind, this represents a somewhat higher risk to a lender. As a result, a borrower may pay higher points and fees and have a higher interest rate compared to the original mortgage. With a second mortgage you’ll pay additional closing costs so you’ll want to consult a tax advisor to discuss possible tax implications.
A second mortgage should not be confused with refinancing which is when you opt to replace your current mortgage with a new one. A refinanced mortgage will have different terms such as a lower rate or shorter payoff. While the new, refinanced mortgage may be the second one you’ve had since buying the home (or the third, fourth refinanced mortgage, etc.), this isn’t the same thing as a “second mortgage.”
What’s the difference between the two types of home equity loans?
Although both types of loans are secured by your home’s equity, the line of credit works much like a credit card – you have a credit limit and you may use as little or as much as you want, up to the full amount. Once you pay some of the balance down that amount becomes available for you to use again when you need it. A home equity loan on the other hand is a lump sum that you receive up front. You pay down on the entire amount until it’s paid off, more like a car loan. Both types of loans may have positive tax benefits that you should discuss with your tax advisor.
What else are second mortgages used for?
A “second mortgage” is sometimes referring to a smaller mortgage taken out at the time a home is purchased or refinanced, in addition to the primary mortgage. When used in that way, it generally refers to a piggyback loan used to cover part of the purchase or refinance cost.
One reason for doing this might be to cover part or all of a down payment in order to avoid paying for private mortgage insurance. Another reason for a piggyback loan would be to cover the part of a jumbo mortgage purchase that exceeds the loan limit for conforming loans, so that the rest can be covered by a conforming loan at a lower rate.
Because second mortgages are secured by the equity you already own in your home, this is an option to consider only if you are sure you can pay it back. If you fail to make payments, it does place your home at risk so you may want to consider other options especially if your goal is to consolidate debt.