125 Second Mortgages
The difference between your mortgage amount and the amount your house is appraised at is the equity you have in your home. If real estate prices have increased in your area, you might have accumulated more equity than you realize. The combination of low interest rates and high real estate prices can make a second mortgage a tempting way to take money out of your home.
Traditionally, second mortgages would allow you to borrow against the amount of equity you have in your home. For example if you have a mortgage of $175,000 but your home is appraised at $225,000, then your equity is the difference or $50,000.
Some lenders are willing to bet that your home will be worth more in the future and they’ll let you take out a loan for an amount that’s higher than your equity amount, up to 125% of the value of your home. So, for example, if your home has been valued at $225,000 you could take out loans that total up to $281,250.
So, using the example above, lets say that you have a first or primary mortgage of $175,000 and equity of $50,000. A 125% second mortgage would allow you to take out a second mortgage of over $106,000. Since this type of loan is even riskier than a second mortgage, the interest rates tend to be very high.
The biggest danger with this type of loan is that you get in over your head and can’t make the payments. The mortgage company can take your home. Also, if you sell your home and it hasn’t appreciated enough to cover the extra loan amount, it might actually cost you money to sell your home.
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These types of loans are often advertised as a way to consolidate debt and pay off credit card debt at lower interest rates. By the time you’re considering a consolidation loan, your credit card interest rates are usually very high and the interest on a second mortgage will be lower. But there is more to this type of loan than just the rate.
Before you sign on the loans look at the total cost. Ask about origination fees, points and other financial charges. Also, look at the term of the loan. If you pay for 20 years your monthly payments might be lower but over the long haul you pay a hefty interest charge.
Credit card debt is short term and unsecured. If you default on credit card debt you probably won’t lose your home. If you can’t make the payments on the second mortgage, you can be forced out of your home.
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