When you want to buy a home with the help of a lender, you apply for and get qualified for a home loan, and you use the property as collateral. This is what we call First Mortgages. With first mortgages, you provide a downpayment and pay for the loan with monthly installment fees that consists of the interest fees and principal amount.

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As you’re able to pay the loan, your home’s value increases over time which in turn increases your home equity. Most people make use of their home equity to apply for second mortgages.

What is a Second Mortgage?

Second mortgages are loans homeowners can apply for by tapping into their home equity. Such mortgages are also known as Home Equity Lines Of Credits and make use of your home as collateral just like your first mortgage. Since you already have an outstanding mortgage which is the first mortgage, the loan you take out against your equity is your second mortgage or the HELOC.

How Does It Work?

Second Mortgages are like credit card accounts. Once you get qualified and approved, your lender will lend you a revolving credit that is either a fixed rate or an adjustable rate. Your lender will deposit the funds to your account, and you can withdraw a certain amount as you wish. This is what we call a draw in HELOC. You can use your funds anytime you need it.

Like any type of loans, HELOCs comes with fees. Such costs usually include interest fees, appraisal fees, organization fees, closing fees, and credit check. One needs to have a high enough credit score, a significant amount of home equity, a low DTI ratio, and a stable employment history to get approved.

Where can you use the funds you receive?

One can use a 2nd mortgage Texas to fund several endeavors. Homeowners often make use of the fund for the following purposes.

  • To pay for necessary home repairs and maintenance
  • For home improvement projects meant to increase home value and appeal
  • For credit card payments
  • To pay for a higher education
  • For debt consolidation
  • To fund investments
  • To pay for major purchases
  • To fund expensive vacations
  • To avoid Private Mortgage Insurance

What are the pros of HELOCs?

  • It allows you to borrow a significant amount you can use for a number of ways
  • Lower interest rates than other loan types
  • You can sometimes get tax deductions depending on how you use the funds you receive

What are the cons of HELOCs?

  • You’ll need to undergo a whole new process to get qualified and approved for the loan
  • There’s a risk of foreclosure if you won’t be able to pay off the mortgage
  • You’ll be paying interest fees and other costs

HELOCs are an excellent option for homeowners who want to put their home equity into good use. However, one must consider the consequences and whether or not you have the ability to pay before tapping into your equity. Make sure to shop around for lenders and prepared the necessary documents, in case you’ve made up your mind into taking out a HELOC.