Joel Scheller's Blog
You’ve been paying off your mortgage for 10 years, building equity while making careful financial decisions to ensure that you’re on track to pay off your mortgage. So, all of those payments are essentially money in the bank for you, right?
Not quite. The equity you’ve built toward is home isn’t really accessible until you either fully pay off the home, sell your home and use your equity toward a down payment, or use it to take out a second mortgage.
In today’s article, we’re going to be talking about second mortgages--what they are, when to use them, and when you should seek out other options. Hopefully, by the end, you’ll be able to make a more informed decision.
What is a second mortgage?
A second mortgage is somewhat deceptively named. The process of taking out a second mortgage revolves around using your equity as collateral toward a second loan. That loan amount doesn’t have to be used toward a home, however. It can be spent pretty much at the discretion of the homeowner, as long as you stay within the spending limits of the loan terms.
Why take out a second mortgage?
Homeowners typically take out a second mortgage when an expense is tossed their way, whether foreseen or unforeseen. It could be a costly house or vehicle repair, a child’s education, or any other large expense that you might not have been aptly prepared for.
Types of second mortgages
There are two main types of second mortgages that homeowners qualify for. First is a standard home equity loan. You receive a fixed-rate loan that usually paid off over a loan term of 15 or 30 years.
The other type of second mortgage is a home equity line of credit (HELOC, for short). A HELOC is similar to a credit card in that you are approved for a certain amount but don’t need to spend the full amount.
Risks of home equity lines of credit
This type of loan is ideal for expenses that you maybe don’t know the full cost of. However, there is an inherent risk in taking on an expense that might go over the credit limit of your HELOC.
Just like with credit cards, interest rates vary. However, the interest rate is linked to something called a “benchmark rate.” When interest rates for the benchmark increase, so do your HELOC rates.
Aside from the variable interest rates, HELOCs can also prove to be difficult to manage for people who are already in credit card debt. So, it’s only recommended that you take out a HELOC if you are sure that you can stay on top of your monthly payments and are in good standing with other credit lenders.
Risks of home equity loans
Standard home equity loans aren’t without their own risks. For one, you’re putting your house on the line when you take out a second mortgage. So, before taking out a home equity loan on a new expense, be sure that you can manage that expense or you could risk losing your home.
Having a second mortgage can also make it difficult to refinance your home loan, which could cost you in the long run if it would otherwise pay off to refinance.
Benefits of second mortgages
Second mortgages do have their time and place. Home equity loans, for example, can help you achieve a lower interest rate than a typical loan if you have a great deal of equity built in your home. This could make the most financial sense over the long term.
Similarly, a HELOC might be a better option than a credit card for homeowners who don’t have a credit score high enough to land them a good interest rate.
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Buying a home should be simple. Unfortunately, purchasing a residence can become complicated quickly, especially if you fail to consider the immediate and long-term costs associated with a house.
Ultimately, there are many hidden expenses that a homebuyer needs to consider before he or she purchases a house, including:
Heating and cooling costs, water fees, electricity expenses and other utility bills may prove to be overwhelming if you're not careful. Fortunately, if you learn about various utility costs now, you may be better equipped to keep your utility bills in check at your new residence.
Ask your real estate agent for information about a home seller's utility bills. By doing so, you can get a better idea about how much your utilities may cost if you decide to purchase a particular residence.
Also, if you plan ahead for your utility bills, you can budget accordingly. Keep in mind that utilities are essential in any home. As such, you'll need to account for these costs in addition to your monthly mortgage payments, regardless of the home you buy.
If you're moving to a new city or town, you'll want to consider how your move may impact your daily commute to work, school or any other locations that you visit regularly.
Consider a home's proximity to highways. If you move to a house that is located near a major highway, you may encounter heavy traffic at various points throughout the day, resulting in a lengthy commute.
Also, find out whether public transportation is available near your new home. In some instances, you may be able to take advantage of buses, trains and other public transportation options to get where you need to go without delay.
3. Home Upgrades
Although a home may appear to be a dream come true, there are problems beneath a house's exterior that could bubble to the surface after you complete your purchase. Thus, you may want to put aside money for home upgrades that may be necessary in the near future.
For example, an older home may require a new hot water heater and furnace soon. And if you start saving for a new hot water heater and furnace today, you may be able to replace them before it's too late.
A home inspector can help you identify home problems. This professional will conduct an in-depth review of a residence and provide honest feedback about any problems that could escalate quickly.
After a home inspection, you can always ask the home seller to perform the necessary repairs, or you can walk away from a home offer. On the other hand, you can keep your current home offer, move forward with your home purchase and complete the upgrades on your own.
When it comes to planning ahead for hidden home expenses, a real estate agent can point you in the right direction. Your real estate agent is happy to respond to your homebuying concerns and questions and will do everything possible to ensure you are fully satisfied with any residence you purchase.
There is always an undeniable appeal to move into a brand new home. After all, there shouldn’t be any problems with a new construction home, right? While shiny new appliances and brand new flooring can be appealing, there are many advantages to buying an older home.
It may seem obvious, but older homes are less expensive than newer homes. You might be able to get a bit more for your money if you decide to buy an older home.
Older homes tend to have a bit better quality in their construction. Some aspects of older construction homes cannot even be reproduced with all of the technology that we have in the present day. It’s often true that “they don’t build homes like they used to.” Certain building materials of the past are actually more sturdy than the materials that are used in the present day. Older homes have stood the test of time for a reason!
The Location Is An Established Neighborhood
If you’re not looking to move into an up and coming neighborhood, you could be better off buying an older construction home. You’ll know that a neighborhood has already been established and that people have enjoyed living in the area for years before you got there when you find an older home to purchase. In finding a neighborhood, you’ll look at the important factors like the school district, the walkability of the area and the crime rate. Older homes tend to be in more stable areas. Keep that in mind.
Older Homes Have More Personality
Sure, you could move into a street with new construction and be happy there. Yet, if you move into an older home, you will find a lot of advantages. The landscaping may be more well-established, allowing you to find your favorite features on the outside of the home right when you move in. In a new home, it could take years to establish the same type of curb appeal that you’ll get from moving into an older home.
There’s More Space In An Older Home
An older home may afford you much more yard space and overall square footage. As the world gets more and more developed, space runs short. Older homes were constructed at times when space was at a maximum. These homes were built on larger lots, giving homeowners the advantage of more space.
While you may think that buying a new construction home is the way to go, older homes offer many different things that newer construction homes just can’t bring to the table. Broaden your search and look for older homes, you could be very surprised!