Buying a Home for the First Time or Needing Some Cash? Learn How and When to Use a 1st, 2nd or Reverse Mortgage To Use The Equity
BATTLECALL GUEST EXPERT: John Blakefield, Loan Officer
Throughout your home owning experience, you may run into unexpected events that cause you to use your options of increasing and decreasing both your debt and home equity in your property. Mortgages are really just that, a change in the amount of money you owe (debt) and the amount of ownership in your property (home equity).
The first time you buy a home, it is very common to put down a down payment towards the home price, and then borrow money from a lender to cover the rest of the price. You then make payments with either a fixed or adjustable rate mortgage, based on a predetermined interest rate and terms. This transaction with you and the lender is called a mortgage. And if it is the only mortgage on a property, it is called a first mortgage.
In the case of this first mortgage, you most likely have a larger amount of debt than the amount of home equity, unless of course you borrow less than you put down, then you would have a greater amount of home equity than debt. Every time you make a payment to the lender, your debt decreases and the property's home equity increases. This occurs until the life of the loan has been fulfilled, and the mortgage is paid in full. At this point, the property is free and clear, and you own the property out right.
Anytime during the life of the first mortgage, home owners may choose to borrow against the home equity built in the home and take out a second mortgage. A second mortgage is a mortgage on a property which has already been pledged as collateral for an earlier mortgage.
The process of a second mortgage is much like the process of taking out the first. However, because you are borrowing against the equity already built up in the home, the second mortgage carries rights which are subordinate to those of the first. This means that the second mortgage is second to make a claim and the second to collect if the first mortgage is in default. For this reason, interest rates are often higher for a second mortgage than a first mortgage.
When considering a second mortgage, it is important to outweigh the costs against the benefits. You should shop for credit terms that best meet your borrowing needs without posing undue financial risk. After all, with the responsibilities of a second mortgage, a home owner is more likely to default and possibly lose his or her home. Be sure that you shopped your second mortgage just as diligently as you did the first, comparing annual percentage rates, points, fees and prepayment penalties. All these terms can make a huge difference in the amount of money you will be paying in turn for borrowing against your home equity.
As in the situation of the first mortgage, a second mortgage generally increases your debt and decreases your home equity. The opposite, however, is that of a reverse mortgage.
In a reverse mortgage, a homeowner borrows against the equity in his/her home and receives cash from the lender without having to sell the home or make monthly payments. This cash can be given to the homeowner as a monthly cash advance, in a single lump sum, as a credit account that allows you to decide when and how much of your cash is paid to you, or as a combination of these payments. The homeowner does not have to make any payments as long as he or she lives at the residence. If the homeowner should move, sell the property, or die, then the loan would have to be paid off.
In order to qualify for a reverse mortgage, you must be at least 62 years of age and own a home. This option for a reverse mortgage is perfect for older homeowners who are equity rich, and cash poor. In the case of a reverse mortgage, your debt increases and your home equity decreases.
Depending on what stage of the homeowners experience you are in, it is important to always know your options as a homeowner. With the option to borrow against your equity, you can have cash to improve your home, make improvements to increase the overall value of your home, or live comfortably when there is not any liquid cash readily available to you, but you have equity in your home.
Being a homeowner can be rewarding in many ways, and being able to utilize the money in your home is one of them. Always research terms and conditions of any mortgage, and always borrow from a qualified, trusted source.
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