A fixed rate second mortgage is a second lien on your property that is obtained by utilizing the equity available in your home. With a fixed rate 2nd mortgage you will receive the entire loan amount up front and make payments for the specific term of the loan (such as 10 years, 15 years, etc...). The rate on these loan types is fixed.A fixed rate second mortgage is different from a home equity line of credit because with a home equity line of credit you have a revolving credit limit and with the fixed 2nd you don't. A revolving credit limit is basically the same as a credit card: you have a maximum credit limit and as you pay it down the money becomes available again. With a fixed rate 2nd mortgage you do not have the money available to you again after you pay the loan down or pay the loan off.
The mortgage interest is generally deductible on a fixed rate second mortgage just as it is on a 1st mortgage and also a home equity line of credit. A fixed rate second mortgage is a good idea for people trying to consolidate debt and for people who are looking to do a home improvement loan.
A fixed rate second mortgage is utilized very often when someone buys a house with little or no down payment. A borrower may do an 80/20 loan or an 80/15 loan. The 80/20 is a 80% first mortgage and a 20% 2nd mortgage and an 80/15 loan is a 80% first mortgage and a 15% second
mortgage with the other 5% coming in the form of a down payment from the borrower. The second mortgage in these 2 transactions listed above can also be an equity line of credit but most equity lines are adjustable rates and many borrowers like to have the luxury of a fixed rate and knowing that their payment will not increase and they will have the loan paid off in x amount of years.
You may be entitled to a lower rate if you choose a fixed rate second mortgage with a balloon feature. The loan may be a fixed rate and amortized over 30 years but the note will be due in 5, 10 or 15 years.
Although borrowers always enjoy the comfort and security of a fixed rate it is important to remember than second mortgages are usually not kept for the long term. Because they are normally at a substantially higher rate than a first mortgage, most homeowners end up refinancing them into their first mortgage.
Where the short term rate is in a rising environment, some people prefer the security Fixed Rate Seconds offer over the risky nature of adjustable rates of Home Equity Line of Credit (HELOC). Take for example in late 2005 and early 2006, when the Prime Rate (a short term rate index which most
HELOC's are based on) was only about 0.5% lower than the interest rates of Fixed Rate Seconds. With such a small difference between the Fixed and the Prime, most homeowners opt for the peace of mind that Fixed Seconds offer.
