When you are ready to find a second mortgage, it is best to spend time discussing your options with your Loan Officer, so that you can select the option that best suits your family's needs. There may be several reasons why you would want to find a second mortgage for your home. You could want to lower your monthly payment on an existing second mortgage, consolidate debt to reduce your total monthly bills, or get cash from the equity of your home for home improvements, a large purchase (such as an automobile), or just to have the piece of mind of having the money in your savings account. No matter what your reasons, there are several factors which must be included when looking for a second mortgage.

The first thing that should be looked into when finding a second mortgage is the type of loan that you would like to obtain. There are three basic types of second mortgages: a traditional fixed period loan, a balloon payment loan, and a home equity line of credit (HELOC).

A traditional fixed period loan has a fixed interest rate and a fixed payback period (typically a 15 year loan with a fixed interest rate). The balloon transaction has a payback period that is typically amortized over 30 years, but has a 'balloon' payment due in 15 years. The balloon payment is typically about half of what you owe. This type of loan is typically used when you anticipate paying off, or refinancing the 2nd mortgage before the 15 year balloon period is up.

The third type of loan is the home equity line of credit, or HELOC. This loan is the most flexible of them all, as it allows you to get a line of credit, and use that line of credit in the same fashion as a credit card. You can draw upon it (take money out), then pay it back at your own pace. Your interest rate is typically a variable rate, and each month you will have a minimum payment due based on the outstanding balance. The benefit to the HELOC is that you only pay interest on the portion you need.

Example:

If you got a $50,000 HELOC, but only needed $10,000 to pay off a credit card now, and another $20,000 a year from now for home improvements, you only pay interest on the $10,000 for the first year, and $30,000 starting in year two. In contrast, if you had gotten a traditional fixed interest loan, you would be paying interest on the full $50,000 from day one.

Interest rates on second mortgages are influenced by several factors:

• The amount of your home's value that you are borrowing
• Your credit score
• Your ability to document your income
• The type of loan you choose (fixed or HELOC)

If you are looking to take out a second mortgage to tap into all of the equity in your home (100% financing) your interest rate will be higher than that of someone who has 10-20% equity left in their home, as your transaction is considered to be a higher risk than someone with retained equity. In the same lines, if your credit rating is perfect, you should be getting a better rate than someone with some blemishes.

If you are in a position whereby it is difficult to verify your income via traditional means (W-2s or 1040s), your Loan Officer may have to look for a 'reduced income verification' loan, which adds risk for the investor, and will result in a slightly higher rate.

The most important things to realize is that when you talk to your Loan Officer about a second mortgage, you want to let him or her know what your short and long terms goals are for the loan, as they are professionals and can help you choose the program that could best suit your needs.