For some homeowners mortgages are a great deal. By borrowing against the equity in their own home –the value of this house less the dimensions of the mortgage–owners can take out money at lower prices than most other consumer loans. That makes second mortgages a good way to handle an emergency expense or to repay credit card debt. A second mortgage may be either a home equity loan or a home equity credit line (HELOC).
Federal law, including the Truth in Lending Act and the Home Equity Loan Consumer Protection Act, requires creditors to give anyone looking to take out a second mortgage with complete facts about the rates of interest, fees and closing costs and other expenses involved. Lenders must also show borrowers an annual percentage rate which translates the overall interest and fees –or using a HELOC, only the interest–into a predetermined interest rate, which makes it easier to compare the cost of different supplies. Before this loan is agreed to by them, borrowers are entitled to see this info. When the amounts have changed from the time of closure, they are entitled to back out and ask a refund of any application fees, according to the Federal Deposit Insurance Corp..
In addition to the very low rates of interest, another benefit of taking out a second mortgage is the interest on up to a $100,000 loan or HELOC is tax-deductible, the Investopedia website says. Some lenders will provide high-interest second mortgages for up to 125 percent of the borrower’s equity; in those cases, interest on the portion of the loan which isn’t secured by equity isn’t deductible. In case the proprietor has $60,000 in equity and also occupies $75,000, for example, interest on the extra $15,000 would not be deductible.
The lender can begin foreclosure as the first-mortgage holder may, if a homeowner defaults on a second mortgage. The bank’s interest is authorised to the first mortgage, the NOLO legal website says, so no matter who initiates the sale, the senior lender must be paid off first before a second- or third- mortgage lender receives any money. Junior creditors can sue in court if the foreclosure sale does not recover the money that they lent the homeowner. If a homeowner proposes a short sale–finding a purchaser with a better deal than the creditors could expect to get in a foreclosure auction purchase –all mortgage holders must agree to the sale.