A junior mortgage is also called a second mortgage or home equity loan. You may also choose a home equity line of credit which is also a second mortgage. Home equity loans are separate from primary mortgages and appear after your primary mortgage loan as a lien against your home. Now you know what a home equity mortgage is, how can you use it?
Junior Mortgage: Cash for Many Purposes
Proceeds of a home equity loan can be used for home improvements, debt consolidation, education expenses, emergency expenses and more. Although it's also possible to fund vacations, weddings and new cars, the Federal Trade Commission advises reviewing your reasons and the amount you want to borrow carefully. A junior mortgage adds to the amount you owe against your home. Home improvements funded with a home equity loan can be a good investment, as updating and renovations can add to home value.
You have balances on a couple of credit cards, a few store cards and a credit line at your local home improvement store. Paying these bills along with your mortgage, utilities and other expenses can be a big headache. Consider drawing on your home equity to consolidate credit card debt, medical bills and other one-off expenses. It's important to know that debt consolidation only works to the extent you can avoid incurring more debt. In some cases, you'll find that consolidating several debts with home equity financing may provide a lower payment than the sum of individual payments. You may also benefit with a lower interest rate on your home equity loan than interest rates on some or all of your other bills. Transferring multiple debts into one loan simplifies paying bills and can help avoid missed payments.
Home Equity Financing for Education and Business Start-Ups
You've dreamed of starting your own business or returning to college. Should you borrow against home equity to fund these goals? The answer depends on your tolerance for risk, how much cash you'll need and how much home equity you have. Lenders typically prefer to lend no more than a combined loan-to-value ratio of 80 percent; this means that your primary mortgage and your junior mortgage balances cannot exceed more than 80 percent of your home's current value.
It's important to compare Small Business Administration (SBA) loans and federal and private education loans to financing your needs with a home equity loan. SBA and education loans do not require using your home as collateral for a loan. According to the Department of Education, federal education loans are discharged after the borrower passes away. Your spouse and heirs would not be required to repay a federal education loan, but a second mortgage would survive your passing and have to be repaid.
Things to Know
Home equity loans typically cost less than refinancing your primary mortgage, but lender costs vary. Request and compare multiple quotes to find your best option for home equity financing.
By whatever name, a home equity loan is a mortgage that can be foreclosed if you fail to meet the loan terms. This includes failing to make payments on your home equity loan and in some cases, failure to pay your primary mortgage payments.
Increasing your mortgage debt can mean increased risk. Tapping home equity can be a useful financial tool, but increasing your mortgage debt can be risky. Prior to the Great Recession, many homeowners took out home equity loans based on inflated home values. Then home values crashed and homeowners owed more on their homes than they were worth. Real estate values and housing markets change, but no one knows when the next dip will come.
Consult a professional financial advisor if you're unsure how or if home equity financing can meet your needs. And when you're ready, shop around for home equity loans on LendingTree to get the best rate on your loan.