As you work with homebuying clients, you may be asked for information and guidance about second mortgages. Whether used for home improvements, debt consolidation, small business funds, vehicle purchase, or other reasons, homeowners can be interested in the cash outlays that second mortgages provide. While it’s important to keep in mind that every client’s financial situation is different and there are no one-size-fits-all answers, here are some of the basics you can share to help clients decide whether a second mortgage may be right for them.
- A second mortgage is a loan that is made in addition to a primary mortgage. A second mortgage may be a Home Equity Line of Credit (HELOC) or a home equity loan. HELOCs are similar to a line of credit from the lender from which the homeowner draws money as needed with minimum monthly payments. HELOCs often have variable interest rates, which means the amount owed can change over time. Different from HELOCs, home equity loans provide a lump sum.
- Always advise your clients to talk to their financial advisor before making any decisions about second mortgages and to gather information about the tax implications that a second mortgage could have for them.
- Lenders qualify homeowners for second mortgages based on a variety of factors which can include home values, equity amounts, down payments, debt, credit score, assets, employment history, income, and other considerations.
- Second mortgages are secured by real estate and if payments aren’t made on time, borrowers can lose their homes. In foreclosure or default situations, the first mortgage gets paid off first which means that second mortgages often carry higher interest rates than other types of mortgages or loans.
- It’s important for clients to consider whether their budgets can afford the additional monthly expense of a second mortgage, particularly if the loan carries a variable interest rate that may go up.
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