Your current financial situation and needs will help determine which type of second mortgage is right for you. There are currently two types of second mortgages available, fixed rate and adjustable equity lines of credit.

A HELOC, also know as an Equity Line of Credit or Home Equity Line of Credit, is a credit line using the property as collateral. The line of credit allows the property owner to draw and pay only on the withdrawn money.

Most HELOCS carry adjustable rates that will fluctuate with prime, although there are some types of HELOCS that will allow you to convert your balance to a fixed rate for the life of the loan. This will however only apply to existing balances, and any new charges will be variable until you contact the lender to execute a fixed rate conversion.

A fixed rate loan offers a reasonable amount of security against any interest rate increases, but it is a one time loan. If you wanted to pay it off and use it again in the future you would need to go through the approval process again.

Some home equity lines require an initial withdrawal at closing. That amount varies from lender to lender. Also, be aware that you may be charged a yearly service fee by most lenders.

Many homeowners apply for a HELOC even if they currently do not need it to lock in the purchasing power their home equity has built up, in case there should be a decline in home value. If a homeowner obtains a Home Equity Line of Credit equaling 100% of the current home value, he would have access to 100% of the current equity built in the home, even if home values decline in the near future.

A second mortgage is a common tool for purchasing a home. Rather than make a large down payment, some people choose to take a second mortgage at the same time they take their first mortgage. This is often referred to as a combination loan and is very popular with home buyers with little or no cash on hand.

 

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