Many times when people have been in a home for 10-15 years, the mortgage has been paid down nicely.  But if the house needs some serious upgrades, you can finance a nice mother-in-law room, new hardwood floors or even a swimming pool for your family to enjoy using a second mortgage.  Home improvement home equity loans have the extra layer of value to a lender because you are using your equity to secure the loan and you are improving the very property that the original loan is on.  There might be the need for an appraisal of the property and some “feasibility” information for you to provide to show that the improvements are possible.  But that is to be expected.

The problem with traditional second mortgage loans is that once the money has been given to you, you can’t go “back to the well” for another loan on your property.  But you can get a replacement home equity loan to retire the first one and tap the value of your home for the new loan by going to another lender.  To buy yourself that leverage, make sure there was no prepayment penalty stipulated in the original second mortgage paperwork.

The good thing about a traditional home equity loan is you simply pay it down until it is retired.  With a home equity line of credit, the temptation is very strong to keep using that credit over and over when you get some of it paid down.  That means you never get it paid off and that is not desirable as that loan is tying up equity of your home.

Home Equity  Line of Credit Loans

People often turn to a HELOC because of a superior interest rate that can be had which can be used to retire high interest credit card debt.  Most of these kinds of second mortgagees are the same in how they are put together.  A positive about HELOC loans is that the market for them is very competitive so you can find a lender who wants your business and works to earn it.  Overall, its best to go ahead and work with a lender you know and with whom you already have accounts.  That trust is important when leveraging the value of your home equity.  So take a look at your local bank, your existing mortgage company or even your credit union as they are often able to help you out because you are a customer already.  In a  pinch, the internet if overflowing with lenders who would love to give you a HELOC loan.

Keep your wits about you when you are going over the final paperwork for a home equity line of credit.  Many lenders will quietly mention right before you sign that there is a prepayment penalty.  That clause can really snarl up your loan so don’t sign if that is part of the deal.

One great thing about any kind of second mortgage is that the interest you pay is tax deductible.  But to claim that kind of deduction , you have a tax return where you already exceed the standard dedication on your tax form.  Sometimes there are limits if the interest you paid went over $100,000.  So it’s a good idea to have a cup of coffee with your tax consultant before you negotiate the loan so you know what you are getting into.

There is also one type of loan to avoid at all costs.  That is the kind that will advance you more than the value of your home.  If a lender offers over 100% of the value of your home, avoid that kind of offer.  That kind of loan doesn’t just use the equity of your home, it is seeking to destroy the equity of your home in favor of the lender.

But if you use some good common sense and only do business with lenders who are offering legitimate second mortgage loans, this kind of transaction can be a life saver when you need a big chunk of money for a big “next step” in your life.

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In the last ten years, home equity loans have really taken off.  It has been possible for A-paper borrowers to do very well in getting interest rates as low as 4% to 5 %.  So why shouldn’t people want to take a second look at getting a second mortgage?  If they can help you dodge huge interest rates charged by other lenders, it just makes good financial sense.

You should know the two kinds of second mortgage loans.  One is the classic “Home Equity Loan”.  The other is a more flexible financial vehicle that gives you a line of credit to use with your home equity as the basis for the transactions.  These are often called a “HELOC” (Home Equity Line of Credit) or a “equityline” type of loan contract.

30 Due in 15

The traditional second mortgage is different from a HELOC in that you take out the second mortgage for a one time only fixed sum of money. The schedule for paying back the loan is for an understood period of time with no variations.  If you borrow a set value, perhaps $25,000, you will pay the same interest rate throughout the life of the loan and the payment will be the same each month until you pay the entire contract back.

There is also a contract that has a balloon payment involved which is called a “30 due in 15″ type of loan.  The loan payments are stretched over thirty years like the traditional loan.  But the contract expects you to pay off the loan in 15 years.  If you have not, there is a huge balloon payment in 15 years for you to deal with.  So it is a 30 year loan that is due to be paid back in 15 years.

People often turn to a HELOC because of a superior interest rate that can be had which can be used to retire high interest credit card debt.  Most of these kinds of second mortgagees are the same in how they are put together.  A positive about HELOC loans is that the market for them is very competitive so you can find a lender who wants your business and works to earn it.  Overall, its best to go ahead and work with a lender you know and with whom you already have accounts.  That trust is important when leveraging the value of your home equity.  So take a look at your local bank, your existing mortgage company or even your credit union as they are often able to help you out because you are a customer already.  In a  pinch, the internet if overflowing with lenders who would love to give you a HELOC loan.

Keep your wits about you when you are going over the final paperwork for a home equity line of credit.  Many lenders will quietly mention right before you sign that there is a prepayment penalty.  That clause can really snarl up your loan so don’t sign if that is part of the deal.

One great thing about any kind of second mortgage is that the interest you pay is tax deductible.  But to claim that kind of deduction , you have a tax return where you already exceed the standard dedication on your tax form.  Sometimes there are limits if the interest you paid went over $100,000.  So it’s a good idea to have a cup of coffee with your tax consultant before you negotiate the loan so you know what you are getting into.

There is also one type of loan to avoid at all costs.  That is the kind that will advance you more than the value of your home.  If a lender offers over 100% of the value of your home, avoid that kind of offer.  That kind of loan doesn’t just use the equity of your home, it is seeking to destroy the equity of your home in favor of the lender.

But if you use some good common sense and only do business with lenders who are offering legitimate second mortgage loans, this kind of transaction can be a life saver when you need a big chunk of money for a big “next step” in your life.

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