Understanding Why 2nd Mortgages Rates are Higher than 1st Mortgages
Looking at the interest rates can be very confusing, especially if you are new to the mortgage scene. However, if you are interested in using your home equity as a financial tool now or in the future, it's important to get the gist of them. One of the first things borrowers new to mortgages wonder is why the rates on second mortgages are higher.
First and second mortgages are not created equal, but both are secured by your home. This means that if you default on your loans, the banks get to take your home. However, the 1st mortgage company gets paid first. This isn't always good news for the 2nd mortgage company which is in the second position. If there is no equity and the house goes into default, the 2nd mortgage lender gets nothing. The banks have to cover these kinds of losses and that means a higher interest rate to borrowers.
The interest rates on second mortgages or home equity loans vary as well. You can either get a fixed rate or a variable rate depending on if you want a home equity loan or a home equity line of credit. (HELOC) A fixed rate second mortgage has an interest rate that never changes and your payment will remain the same. Home equity lines of credit on the other hand have variable rates based on the prime and work as a revolving line of credit. Having a revolving line with a variable rate can equal a much higher interest rate than your first mortgage.
Once you understand the difference in the interest rates, you’ll want to decide if a home equity loan or home equity line of credit is right for you. "Whether a home equity loan ... is a 'good borrowing opportunity' depends on the borrower's circumstances," said Kurt Bauer, president of the Wisconsin Bankers Association. Make sure that you can comfortably make the payments and feel confident about the variable rate if you choose to go with that option. You can also investigate a cash out refinance if want a single payout and a better interest rate.
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