Variable Rate HELOC Second-Lien Mortgages
A second mortgage, or lien, gives you access to a home equity line of credit (HELOC), in addition to the first mortgage. For example, if your property is valued at $250,000, and you have an existing mortgage for $160,000, then you are eligible for a second lien worth $90,000.
The HELOC is similar to a variable, or adjustable, rate credit card, with a line of credit where you pay interest on any and all withdrawals. You can use this cash infusion to consolidate debts, pay for college tuition or home improvements. Using this kind of re-financing has multiple advantages over other kinds of loans. These mortgage loans offer tax benefits, lower interest rates and reduced monthly payments.
In addition, the HELOC offers great versatility and flexibility. You can keep the credit line open, without using it, as an emergency fund. No fees are generally charged for keeping a second-lien HELOC open when you have not made any withdrawals. Interest payments are tax deductible and you can use the funds to buy a car or finance a business startup or even invest the money with returns greater than the interest on the HELOC. The main intention of availing of this facility is to have access to low cost financing and get rid of other debts.
Should you feel that you want to withdraw the full amount, you can always convert into a fixed rate home equity loan, which has even lower, and fixed, rates. HELOCs have no prepayment fees and are strictly regulated with caps on maximum interest rates of around 18%, depending on your state of residence, thus helping you avoid the debt traps which credit card spending and business loans might possibly lead to.
Interest rates on a HELOC are adjusted on the first day of the month, following a change in the prime rate. Please note that interest rates can differ from one lender to another and if you need a second-lien, please consider doing some preliminary research to find the best lender, who offers a low introductory rate for a few months, and has a margin (difference between prime rate and HELOC rate) as small as possible. For example, if a lender offers an introductory rate of 4.5 % for 3 months and charges a margin of 5% over prime, you might pay 4.5% for the first 3 months and around 10% or more after the introductory period, even if the prime rate remains the same.
If you are eligible, find a reputed lender and ask the right questions about introductory rates, margins and prepayment fees. It does not cost anything if you do not use the line of credit, and the HELOC is a highly useful and remarkably cost-effective source of funds in an emergency.