Everyone has heard a friend or relative complain about having to take out a second mortgage but don’t really know what that means. Let’s find out!
The real term for this is called a home equity loan. This is a common loan type that homeowners can use for whatever they want.
A home equity loan requires that you use your house for collateral just like a normal home loan. There are different types of home equity loan out there and you can always use the money for whatever you want.
College, bills, and home repairs are some common uses. You will need outstanding credit to be approved for this kind of loan though.
A closed end type home equity loan gives you a big chunk of money immediately and you can’t get another loan until this one is fully paid.
The amount you can get depends on factors such as how much your home is worth, your income, credit score, and similar things. A closed end loan usually comes as a fixed rate type and allows you up to 15 years to pay it off.
An open ended home equity loan is a little different. This loan will let you borrow money whenever you have a need for it.
The loan lender will set up a line of credit that is pretty much based on all the same factors as the closed end loan. These usually have an adjustable rate and you can make payment for 10, 15, or even 30 years.
So why are these called second mortgages Because you are adding yet another loan payment that uses your house as collateral and adding another monthly payment. Though tempting, it can cause you a lot of problems in the future.