Second
Mortgages
(versus
5th mortgages)
Second mortgages go
by many names. Second mortgages can be called home equity loans,
home loans, 100% home loans or 125% home loans or home equity
lines of credit. Second mortgages by any other name are still
second mortgages. A first mortgage is a pre-requisite to a second
mortgage. Most second mortgages are taken out in order for some
sort of cash benefit.
Second mortgages can be used to pay for home improvements, buy a
piece of property, pay down credit cards, pay for college or to
pay for an auto loan. The one thing that a second mortgage should
not be used for is a bank account. When a second mortgage is used
to take the place of an ATM machine, usually trouble ensues and
sometimes financial disaster.
Some people have to
decide between taking out a second mortgage and taking money out
of their 401K's in order to get the cash they need. Many choose
to take money out of the 401K instead of a second mortgage because
they think this is a better deal. For some it may be. But, consider
that the true value of a 401K is the accrued interest over the long
run that you may be giving up and all of a sudden, a second mortgage
may look a whole lot better.
Second mortgages are
not all cookie cutter contracts. Some second mortgages can run for
as long as 15 to 25 years and others have to be paid back after
just one year. Second mortgages also have fees that are similar
to first mortgages. Fees and points will go to the lending company
for making the loan. In addition, second mortgages, like first can
be at a fixed rate or a variable rate. Make sure you know which
one you've signed up for when getting the loan.
The two major types
of second mortgages are home equity loans and home equity
lines of credit (HELOC). Home equity loans are lump-sum
loans and are generally amortized like most first mortgage
loans. HELOC loans can be variable rate, continual use or
future amortization. Variable rate loans fluctuate with
the prime interest rate and are attract when the prime is
low, but can be very unappealing when interest rates rise.
Continual use loans can be accessed as long as there are
funds. This is most like a credit card account with a credit
limit. With a future amortization account, in some future
date you'll no longer be able to withdraw funds and will
have to start making monthly payments of principal and interest.
So, when is a good
time to take out a second mortgage? First, take out a second
mortgage only if needed and second, take one out when the
prime interest rate has dropped at least one point below
what you're currently paying. Like all rules of thumb, though,
you have to know how to play your hand.
Fiction:
What is even more optimal than taking out a second mortgage
on a home is taking out a fifth mortgage. Hey, if you're
a gadget hound like me, you can use that money to buy the
biggest HD 3D Big Screen TV on the market. You can also
buy pink flamingos and lawn deer. And with your fifth mortgage
why not pay for a flight into low earth orbit on the Virgin
Galactic space plane. Life is too short for only one mortgage.
Remember to run up your bills so your kids and grandkids
will look disappointed during the reading of your will.
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