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2nd Home Mortgage Loan – Benefits to having a Home Equity Line of Credit

April 4th, 2006

2nd Home Mortgage Loan – Benefits to having a Home Equity Line of Credit

Real Estate

A second mortgage on a home can be beneficial.  These second home loans usually offer lower interest rates compared to credit cards.  This can save you a ton of money by lowering your monthly payments.

While credit card companies offer temporary promotional rates of 0%, you might not be able to pay these credit cards off if the ballance is too hit and you may be hit with high interest rates as time goes on.

It may be better to set up a second home equity line of credit before you even need it.  If something very expensive unexpectedly happens, you would be able to finance it without having to worry about getting approved at the time you need it most.  It can cost $50 a year or more depending on the lender to have a home equity line of credit.  Usually the first year is free.

 

Interest rates on a home loan whether it is a first or a second is tax deductible, and you can save on your income taxes.  Interest paid on personal credit cards are not tax deductible.  This could be beneficial, depending on your finances.  Talk to your tax consultant.

A good example of why you would want a home equity line of credit is for an earthquake or other natural disaster.  Earthquake insurance, through the state of California, has a very steep deductible.  A house that is valued at $360,000 could have a deductible of more  than $36,000.  If you live in or near an earthquake fault area, there is a chance your house could be totaled.  If you don’t have the funds ready for the deductible, all the money that you paid for earthquake insurance is not going to be of any help.  If you wanted to get a loan at this point it would be more difficult because your house is no longer standing.   The same principle could apply to flood and fire areas as well.

 

If you have high deductibles, you should have some way to finance the reconstruction if disaster strikes.  Medical procedures and hospital stays can also add up to a lot, even with health insurance.  Some health insurance plans have a 20% co-pay and they can go up to 50%.  A trip to the hospital could add up to a lot of money.

When shopping around for a second home loan you will likely come across many of the same credit card companies offering these products.  If you have had a good experience with the credit card company you may find that their home loan products are also a good choice.  The best thing to do is find out what plans are offered.  The 2nd mortgage home equity line of credit usually will offer a 10 year period to borrow money and have a 20 year time period to pay back, for a total of 30 years.  The adjustable rate interest is often lower than credit card rates. 

Your interest rates are determined by your credit rating.  If you credit score could be improved and you have some time to do this you would be probably better off improving the score before you apply for a second mortgage.

 

The second mortgages usually with an adjustable rate loan often have interest only monthly payments.  This can be helpful if you are looking to lower your monthly payments on credit card payments.  If you fix the rate with a locked interest rate, which some lenders will offer multiple fixed interest rates within the first 10 year period, it can help protect against interest rates that may go up in the future.  If you lock the interest rate into a fixed rate, you also can determine the payback time with the lender at the time of the lock.  Once the lock is in place, you will pay more than just interest only each month.  You need to ask the lender if they offer lock rates and how long the loan period is for, as all these loans will vary.

After the 10 year period of time is up you can negotiate to see if they will be able to offer a fixed rate.  They will continually adjust the payments along with the principal if you are on an adjustable rate interest.  This could mean different payment amounts from month to month.  If you have reached this point and still have a balance you probably should refinance both your first and second loan into one loan so long as the interest rates are favorable to do this.  Your loan may expire in 10 years so make sure you understand how long the loan is for and if there is a payment time extension.

 
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Nicole Wilson
Best Syndication

Real Estate

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