Fixed Rate Second Mortgage To Fix Up Your Home

2007-03-08 10:33:40

( Financial )



You already have a first mortgage on your home. That is probably how you acquired it in the first place: you made a down payment then arranged with your mortgage banker to pay the balance in monthly installments. For this purpose, your banker established a mortgage on the house. Having accumulated equity in your home, you now have the option to borrow against that equity inexpensively and conveniently. Lenders call these loans against home equity as second mortgages.

Many homeowners have done that – one in six, according to census data, from almost nothing in the 1980s – and taken out second mortgages on their home. Second mortgages have become popular because 2nd mortgage rates are lower than other financing sources and the interest paid is tax deductible.

Second mortgages should not be taken for unproductive uses like a cruise. The funds are better used for paying off high-cost credit card debt, or a college education. But the best use is for home improvement, which adds even more value to your home.

If you need all the money at one time for your home improvement project, your best mode of borrowing is a fixed rate second mortgage, better known as a home equity loan. If you improve your home in stages and your cash needs are stretched out over time, you’ll probably want a home equity line of credit (adjustable-rate mortgage or ARM).

A fixed rate second mortgage usually has a higher rate than an ARM. If you plan on paying off the loan over at least seven years, it makes sense for you to get a fixed rate second mortgage. You will avoid the fluctuations on 2nd mortgage rates that would affect ARMs.

Some people have used second mortgages to pay their first. Consider that closely. As a rule, 2nd mortgage rates are higher than first mortgage rates. But if prevailing 2nd mortgage rates for fixed rate second mortgage are lower than firsts, then it makes sense to pay off the first mortgage with a fixed rate second mortgage because then you save on interest payments.


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