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Stand Alone Second Mortgages Factor the Costs of the Loan Staff - Mortgage Lenders Plus.com

With the rapid appreciation of home values, many homeowners have sought methods of turning their home equity into cash. There are two methods of obtaining cash-out financing on your home: one is the home equity line of credit (HELOC) and the other is a stand alone second mortgage. Another term used for loans of this type is “home equity loan;” however the term ‘stand alone second mortgage’ describes the loan more completely.

A HELOC, or line of credit, is provided by the bank like credit provided by a credit card, only this credit is secured by the equity in your home. You can draw down on the credit line as much as you want, at your convenience. The stand alone second mortgage is another home loan taken out that is also secured by your equity in the home, but is provided in one lump sum. You are borrowing a fixed amount as a second mortgage and you will be paying on the entire amount, whereas with a HELOC you are paying only on the funds you have drawn down.

There are a couple of advantages to the second mortgage approach. If you need the funds immediately, your best option is a loan rather than a line of credit because a second mortgage can be had at a fixed rate. HELOCs are almost always adjustable rate arrangements. The interest rate on a stand alone second mortgage is going to be lower than on a line of credit, although it will probably be higher than the rate on your principal mortgage.

Second mortgages are typically provided for periods of no more that fifteen years – although some institutions will make them available as thirty year notes (with the commensurate lower payments) that have balloon payments at the end of fifteen years. Second mortgages are also going to have significant costs attached to them, not unlike your initial mortgage. You will probably be paying points on the loan and will have appraisal fees, loan origination fees and so forth.

So when you’re shopping for a stand alone second mortgage, factor the costs of the loan into your long term plans. You probably need to stay in the house for a while in order to make the loan worthwhile. Keeping a fixed interest rate will help stabilize your household expenses in the long run, especially if you are using some or all of the loan to refinance other debt.