SECOND MORTGAGE FINANCING
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.
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
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 too high.
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.