Types of Second Mortgages
An equity mortgage is a type of mortgage in which the borrower sells part or all of their home equity to a financial institution. Shared Equity mortgages (sometimes also known as shared appreciation mortgages) are loans where the mortgage lender acts as both an investor and lender. In a shared equity mortgage agreement, the homeowner sells part or all of their house to the lender in return for a discount on the overall loan amount. Equity mortgages allow homeowners to enjoy tax benefits, cash back options and capital appreciation. As a general rule, equity mortgages allow more flexibility than traditional mortgages and, therefore, attract borrowers who have a sound financial condition.
Fixed rate equity loans are loans in which the rate of interest is fixed. It remains the same throughout the life of the loan. If the interest rates drop below the set level, then the borrower will have to pay interest above the fixed rate. To make up for the interest payment, he can either pay interest twice every year or once every year.
Borrowers who purchase their first home with an equity mortgage can opt to pay interest only. This means that for the first few years they can finance the cost of the house without making payments. After the first few years of paying interest-only, borrowers can start paying regular monthly installments.
As mentioned above, borrowers can opt to make regular monthly payments. However, they do have to understand that interest rates will eventually shoot up. In some cases, the cost of living will also rise. This means that their payments will eventually become high. A growing-equity mortgage lets borrowers spread the cost of the house payment over a longer period of time.
The second option that homeowners have is to take advantage of growing equity. This can be done by refinancing. Refinancing allows a homeowner to put his property value on the line. If the new mortgage loan balance is higher than the previous homeowner’s equity, then the equity will continue to grow.
Shared equity mortgages allow the borrowers to build up a mortgage insurance policy. There are two types of policies – fixed and adjustable. With fixed-rate mortgages, borrowers will build an equity stake that represents the total amount that they have paid towards the home. With adjustable-rate mortgages, however, borrowers will receive payments that are tied to the rate of interest. The borrowers will never receive an increased amount of interest. They will just be receiving the minimum interest rate.
One other advantage of growing equity through home equity loans is that there is no prepayment penalty. As long as the borrower retains the property as his principal residence for at least three years, he will not have to pay any of the additional mortgage loan payment fees. For borrowers who want to get out of a mortgage quicker, this feature is very attractive. Instead of paying several years of fees and penalties, they can move their home faster by just paying the one lump sum payment.
Home equity loans can be a great way to pay off high interest credit card debt or small mortgage payments. But the borrowers need to make sure that they are properly budgeting and using the loan proceeds to repay their mortgage. Mismanagement can quickly lead to financial disaster. It is important for borrowers to spend their money wisely and not go into debt. Otherwise, they may find themselves even worse off than when they started.
There are several types of home equity loan programs. The most common is the fixed-rate second mortgage, which pays off the first mortgage and offers a lower interest rate on the second mortgage. The second mortgage is paid off with a fixed amount each month until the full balance has been paid off. This type of equity loan is best suited for homeowners who know how much they will be spending on their monthly mortgage payments.
The flexible interest-only mortgages are another choice for borrowers. These mortgages only allow the homeowner to make interest-only payment each month until the balance has been paid off. At that point, the homeowner can start making payments on regular interest rates. This type of second mortgage is good for borrowers who want to save money, but are concerned that if they don’t pay their mortgage fully right away, they will be locked into higher payments that will cost them a lot more in the long run.
Last is the mortgage refinancing. Some lenders offer borrowers the option of combining their first mortgage and first loan into one second mortgage. With a mortgage refinancing, the borrowers can combine their mortgages into one monthly payment without having two separate payments. This type of refinancing is good for borrowers who own a home they plan on selling in the future. shared-equity mortgages allows you to spread the cost of a loan payment over a longer time frame, which could potentially save you money.