Maintaining and understanding the terms of the second mortgage would be easy for most borrowers as they already have a primary mortgage and they know how the terms work. However there are some loopholes that you must watch out for. Please keep these ten common mistakes so that the second mortgage does not leave a bitter taste in your mouth.
1. Make sure you have a clear knowledge of Helocs and home equity loans. While home equity loans are often fixed rate mortgages, Helocs are adjustable rate mortgages or ARMS. Home equity loans allows you to avail of the loan with a single down payment, Helocs on the other hand offer the option of credit line, where you can get a payment advance till you don’t exceed your credit line. The purpose of both is also different; with home equity loans you can do a home improvement or consolidate existing debts conversely with Helocs you can meet your periodic financial needs.
2. Do not take a large credit line. This may initially look very attractive but in the long term it could prove to work against you. This credit line is considered when you are opting for other loans and this may result in your getting rejected for the loan. Generally your credit line payments are based on your gross credit liability. Even if you have no outstanding balance on your credit line, having a large credit line automatically means that you have to make huge payments and this may adversely affect your ability to pay any other loan.
3. Settling for the first mortgage lender means you have not carefully checked all your options. You could opt for a loan with your primary lender or even your bank, but if you want to save money, check all the lenders to get the lowest possible interest and the best terms and conditions.
4. Ask for a good faith estimate from your lender so you know in advance what you are paying for, you should not suddenly have additional charges later on.
5. Don’t assume that the second mortgage will be cheaper, do a careful calculation to check out your options.
6. Do not opt for a refinance if you have a second mortgage unless you wish to ask the new lender for subordination, otherwise the second loan will be consolidated with the first when you refinance.
7. Check out if the second mortgage is fully tax deductible. This information should not be expected from the lender; rather it should be actively sought from a tax consultant.
8. If you have opted for a Heloc to pay off credit card bills make sure you have not completely exhausted the credit line or else you may not be able to repay this loan.
9. Most loans have a prepayment penalty associated with the loan, please make sure you have checked this otherwise if you plan to refinance you may have to pay additionally or may not be able to refinance immediately.
10. Often second mortgages have life caps, if you are unaware of this when you obtain a loan then you may not be ready for increased payments.
