What Defines a Second Mortgage?
A second mortgage constitutes an additional loan secured against a property that is already subject to an existing mortgage.1 Many individuals contemplate leveraging their home equity to fulfill substantial financial requirements, yet the specialized terminology within the mortgage industry has often blurred the precise meanings of certain terms, including “second mortgage.” Essentially, a secondary loan, or mortgage, against your residence will manifest either as a home equity loan—a lump-sum disbursement with a fixed term and rate—or as a HELOC—which features variable rates and continuous access to funds.2
Is a Secondary Home Mortgage the Right Choice for You?
A loan utilized for purchasing a home typically represents the first mortgage lien recorded against a property. Subsequent loans are contingent upon the extent of the owner’s equity in the home and generally necessitate a new appraisal. Homeowners have the flexibility to use the funds from these second mortgages—available as either a lump-sum home equity loan or a home equity line of credit—for any purpose they deem fit. The decision regarding which loan type is most suitable for you will hinge on the loan’s intended use and your personal spending habits.
What Is a Home Equity Loan?
A home equity loan is commonly characterized as a fixed-rate loan disbursed as a single lump sum, with terms typically ranging from 5 to 30 years.3 Repayment occurs through consistent fixed monthly installments. This particular loan type might be advantageous if you foresee a significant one-time expenditure, such as a wedding, the acquisition of a second property, or the consolidation of existing debt. A fixed interest rate coupled with predictable monthly payments can greatly assist in budgeting as you work towards your financial objectives.
When to Consider a Home Equity Line of Credit (HELOC)
If your need for additional funds is intermittent rather than a one-time event, a variable-rate HELOC could be a more appropriate solution. Once your lender approves you for a maximum credit limit, you gain the ability to access available funds as and when you require them. You can utilize your Home Equity Line of Credit Visa® Access Card wherever Visa® is accepted, issue a check, visit a branch or ATM, or log in to Online or Mobile Banking to transfer funds directly to your U.S. Bank savings or checking account.4 You may enjoy ongoing access to these funds for a period of 10 years, known as the draw period, commencing from the date your line of credit is established. Following this draw period, a repayment period of 20 years will ensue.
Monthly minimum payments are variable and are calculated based on the outstanding line balance and the prevailing variable interest rate.5 As you repay the borrowed money, the funds become available for re-access on your HELOC. This dynamic provides a renewable source of funding throughout the 10-year draw period. This option proves particularly beneficial if you anticipate the need for periodic payments for tuition fees or ongoing remodeling projects.
Although a home equity line of credit offers continuous access to available funds, which some individuals may find tempting, there are several crucial factors to take into account:
- You are required to pledge your home as collateral.
- Failure to make payments can lead to your property undergoing foreclosure.6
- Your credit score is at risk if you do not diligently manage your payments.
Ultimately, home equity loans and HELOCs represent viable choices for many individuals. The mortgage interest may be tax-deductible, and these second mortgages empower you to utilize your home’s equity to cover substantial expenses. Contact a banker or visit one of our numerous branches for more detailed information; they are equipped to understand your specific needs and present suitable options.