If you are like most homeowners, you probably have a first mortgage loan on your home. Typically, such loans are for 25 to 30 years, with the monthly payments adjusted so that the loan is paid in full at the end of the term.
As you make monthly mortgage payments and the value of the home increases, your interest in the property (called "equity") grows. After a while, some homeowners may wish to borrow against the equity in their home to get cash, to make home improvements, to educate their children, or to consolidate personal debts. Because such loans are in addition to the first mortgage on the home, they are commonly called "second mortgage" loans.
Second mortgage loans are different from first mortgages in several ways. They often carry a higher interest rate, and they usually are for a shorter time, 15 years or less. In addition, they may require a large single payment at the end of the term, commonly known as a balloon payment.
Traditionally, second mortgage loans are offered with a fixed loan amount and a predetermined repayment schedule. Some lenders now offer lines of credit that allow you to obtain cash advances with a credit card or to write checks up to a certain credit limit. These often are called "home equity lines" because the equity in your home is collateral for the amount of credit you request. As you pay off the outstanding balance, you can reuse the line of credit during the loan period.
This brochure provides answers to some common questions people ask when they begin shopping for a second mortgage or home equity loan. It discusses choosing a lender, the meaning of some mortgage terms, costs, disclosure documents, and contacts for resolving problems.
How do I choose a lender?
When you are looking for a lender, shop around and make comparisons.
Interest rates, repayment terms, and origination fees may vary
substantially. Ask your local banks, savings and loans, credit unions, or
finance companies about their loan terms. Although you will want to select
the lender who offers you terms most suited to your needs, be sure to ask
and compare the annual percentage rates (APR) because they will give you
the total cost of the loan, including financing charges.
Some second mortgage loans may extend for as long as 15 or 20 years;
others may require repayment in one year. You will need to discuss the
repayment terms with the lenders and select one who offers terms that best
suit your needs. For example, if you need to borrow $20,000 to make
repairs on your home, you may not want a loan that requires you to repay
the entire amount in one or two years because the monthly payments may be
If you have a fixed-rate loan, the interest rate is set for the life of
the loan. However, many lenders offer variable rate mortgages, also known
as adjustable rate mortgages or ARMs. These provide for periodic
interest-rate adjustments. If your loan contract allows the lender to
adjust or change the interest rate, be sure you understand when the lender
has the right to change the interest rate, whether there are any limits on
how much the interest or payments can change, and how often the lender can
change the rate. You also should know what basis the lender will use to
determine a new rate of interest.
Be sure you understand how much your monthly payments will be and what
they cover. Your lender should be able to give you this information in
advance. With some loans, you will be required to make monthly payments on
the principal and interest. With other loans, you may be required to pay
interest only on the borrowed amount; in these loans, your monthly
payments will not reduce the principal amount of the loan. With such a
loan, you will be required to pay back the entire borrowed amount at the
end of the loan period. These loans are popularly known as "balloon
loans." If your loan has a balloon payment, you should consider how you
will arrange to repay the entire amount when it becomes due.
Many companies will charge a fee for lending you money. The fee is
usually a percentage of the loan and is sometimes referred to as "points."
One point is equal to one percent of the amount you borrow. For example,
if you were to borrow $10,000 with a fee of eight points, you would pay
$800 in "points." The number of points lenders charge varies, so it may be
worthwhile to shop around. If the fee seems too high, you may be able to
bargain for or find a lower fee. Be sure to get the amount of the fee in
writing before you take the loan. Many states limit the amount of fees a
lender may charge on a second mortgage loan. You may want to check with
your state's consumer protection office or banking commissioner to
determine whether there is a limit in your state.
If your loan is primarily for personal, family, or household purposes,
the lender is required to give you a federal Truth in Lending disclosure
form before you sign the customary loan documents, such as a note or deed
of trust. This Truth in Lending form will tell you the actual cost of the
loan. It includes the annual percentage rate, the finance charge, and the
fees included in the loan. For "home equity lines," your lender also is
required to send you a periodic statement, usually monthly.
If you ever have a problem making your loan payments, talk to your
lender as soon as possible. Some lenders will work with you to arrange a
temporary payment plan. Also, call the lender if you have any questions
about your loan.