If you are considering taking a second mortgage to cash out equity in your home there are a number things you need to know before applying. Here is what you need to know about home equity loans and your finances.
A second mortgage is simply an additional loan secured by your home. A second mortgage is a type of home equity loan that has advantages over other home equity loans. The main advantage of using a second mortgage over a home equity line of credit is that this loan comes with a fixed interest rate. Home equity lines of credit come with variable interest rates. Another advantage of a second mortgage is the interest you pay is a tax deduction on your Federal income tax.
Lower Interest Rates
Second mortgage loans are secured by your home; if you default on this loan the lender will foreclose and take your property. Because the mortgage is secured by your home you will receive a lower interest rate. You will have to pay closing costs for the loan; the lender may require you to pay points upfront in order to qualify. Points are prepaid interest due at closing; one point is equal to one percent of the loan balance paid in exchange for a lower interest rate or to qualify for the loan. There may be other fees involved such as application fees and other administrative expenses.
Save Part of Your Equity
Always keep a portion of the equity in your home as a cushion; by saving at least twenty percent of your equity you will qualify for better interest rates on your second mortgage loan. There are lenders that will allow you to borrow one hundred percent of your equity; however, you will pay much more for these loans.
Shop for the Best Deal
It is important to shop from a variety of lenders to find the best deal for your second mortgage. If you shop online you will be able to comparison shop from a variety of lenders quickly. Make sure you are comparing all fees including closing costs, not just the interest rates or the annual percentage rate.
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Louie Latour specializes in showing homeowners how to avoid common mortgage mistakes and predatory lenders. For a free copy of "Mortgage Refinancing - What You Need to Know," which teaches strategies to find the best mortgage and save thousands of dollars in the process, visit Refiadvisor.com.
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