With home values rebounding dramatically the last few years, many home-owners are mulling over an second mortgage or credit line that provides them access to quick cash at a cheap rate. A home equity loan or line of credit are still the two most popular second mortgage programs in the new year. A person’s home is generally one’s most valuable asset, so it can be used to back or guarantee another loan.
If you are thinking about getting a home equity loan or 2nd mortgage, remember most importantly that if you fail to pay the loan, the bank can force a sale of your home.
How Do the New Laws for Tax Deductions Effect Homeowners?
Congress passed a new tax bill that included a few significant tax considerations for second mortgage interest in 2018. Today, homeowners can no longer deduct the interest on the second mortgage. In the past most, homeowners were able to deduct the interest on a 2nd mortgage up to $100,000 in most instances. Read more on tax deductions for home equity loans in 2018.
What Type of 2nd Mortgage Is Best for You?
One of the first decisions to make in this process is to decide between a fixed rate 2nd mortgage and a variable rate HELOC. A fixed rate home equity loan is generally less common today; it provides the homeowner with a lump sum withdrawal of a portion of your equity. This type of loan may be suitable for you if you have one, large, fixed expense you need to cover. The home equity loan features a fixed interest rate. While it is higher than the initial rate for a home equity line you know exactly what your payment will be until the loan is repaid.
A HELOC, on the other hand, is a variable rate line of credit that uses your home’s equity as a source of cash for what you need. The HELOC is generally more popular today because it comes with a lower initial interest rate. But keep in mind that the rate can and will go up. Not only do interest rates tend to rise with time; you only are paying interest on the loan during the draw period.
Once the draw period is up after five or 10 years, you must pay back principal too. The equity line of credit only requires you to pay interest on the amount of money you have used; with the home equity loan, you pay interest on the full amount. HELOCs are often the best choice for homeowners who want to make upgrades and repairs to their home. It is not a good idea to use your equity to pay for things that will not add to your wealth, so use caution.
It was HELOCs that cause many homeowners problems during the mortgage meltdown. Once the rates rose, many people out of work could not keep up with payments, and they lost their homes. So, it is important to consider carefully which of these loans work for you and that you can make the payments. Read more on how HELOC loans work.
Getting the Best 2nd Mortgage Rate
This is largely on you. It is a good idea to do plenty of shopping for your fixed rate loan or HELOC. Check for the best rates with several sources, such as a mortgage broker, bank and credit union. If you are getting a home equity line of credit, remember that the initial rate is often a teaser; the rate can and will go up over time. With a fixed second mortgage, you will pay a higher rate (also higher than your first mortgage rate), but you know what the payment will be for the entire loan term. What are today’s 2nd mortgage rates?
Check for caps on the interest rate for a HELOC. Be sure you know what the maximum rate is you can pay. If it freaks you out, you are better off with a fixed rate second mortgage. Keep in mind that the economy is improving in 2018 and interest rates are on the upswing. So, there is a solid chance rates for HELOCs will rise in the coming years.
Takeaways on Today’s Second Mortgages
A second mortgage – whether it is an adjustable rate home equity line of credit or a fixed interest home equity loan – can be an effective way to add to your wealth or to get the money you need for a major, important expense. If you prefer a more predictable payment structure, opt for the home equity loan. If you are okay with more uncertainty and want a lower initial rate, the HELOC may be for you.