Considerations for a Second Mortgage

Katie Moore, Loan Officer

If you’ve ever found yourself facing a large expense, such as a home addition or remodel, then it’s possible that you’ve considered using your home’s equity as collateral to secure the funding. Your equity is the value of your home, minus the amounts of any debts for which your home is collateral.

EQUITY = HOME VALUE - DEBT

As such, these loans are often referred to as second mortgages. When it comes to shopping for a second mortgage, one of the key items to consider is the type of loan that you will need. It is important to understand what the options are and the benefits of each.

The first loan option is a lump-sum loan (sometimes referred to as a real estate equity loan, or a Home Equity Fixed Mortgage [HEFIX] loan). These loans feature a fixed interest rate as well as a fixed loan term. With lump-sum loans, you’ll receive the full loan value upon settlement and begin to repay principal and interest immediately. The loan term will determine the number of years that you will need to make payments until the loan is fully repaid. The advantage with this type of loan is the fact that the interest rate is locked in, and the loan will be paid-off within the designated loan term.

The second loan option is a Home Equity Line of Credit (HELOC). Unlike a lump-sum loan, HELOCs feature a variable or floating interest rate, meaning that the interest rate can change, moving either up or down, during the life of the loan. A HELOC offers greater flexibility to a borrower by allowing you to borrow less than the full loan value, since you only have to pay interest on the amount that you’ve borrowed.

For example, if the full value of the HELOC is $100,000, but only $5,000 is being borrowed, you’ll only be paying interest on the $5,000 borrowed. If no funds are borrowed at any point during the loan term, then no payments have to be made. HELOCs are also revolving, meaning that their funds can be re-advanced during the loan’s term, so any amount that is repaid can be used again, similar to a credit card.

When deciding on a second mortgage there are several things to keep in mind:

• A HELOC will typically be a better option if you are unsure of the amount that you will need to borrow, since you will not have to pay interest on the full loan value, only what you have borrowed.

• Knowing the amount that you need to borrow will usually make a lump-sum loan the better choice, since you will know exactly what your payment will be and do not run the risk of having your interest rate increase.

Given that all loans are unique, if you have any questions, give your loan officer or Farm Credit a call to discuss your situation and determine what loan will be best for you.

Katie Moore, Loan Officer