No Closing Cost Second Mortgages

Second mortgages are mortgages which are in second position and can be used for a variety of things, vacation, education, remodel, car, whatever. However, I would suggest against using second mortgages for any frivolous items like cars, vacations, etc. Using the money to remodel and improve your house, or higher education would be a wise move though.

There are two kinds of second mortgages. The first one is a Home Equity Loan, or HEL. Just as the name suggests, it is just a loan with a fixed percentage rate for a fixed period of time, whatever that may be, 10, 15, 20, etc. Your payments are always fixed until the loan is paid off. Once the loan is paid off, then the lender will cancel the lien on the house and you are then again able to get another loan. This does not mean that you cannot refinance a HEL, you just have to reapply and get a new loan, which usually pays off the original HEL. Some lenders may have other requirements to allow you to refinance your Home Equity Loan.

HEL's are most useful when used for fixed items and terms because of the way they are designed. If your financial needs may fluctuate as life goes on, then a HELOC may be the best way to go to access to your home equity. Of course, the HEL also allows you to lock in a fixed interest rate. In today's interest environment, that may be the best option. There is a lender out there that is offering a HEL at 4.99% fixed for up to 20 years. Can you imagine paying 4.99% for 20 years? This does not even take into account the interest rate after you take into account the tax deduction for the interest you may pay on it. Needless to say, this is an attractive proposition because nobody can say what the interest rate will look like in 5 years or 20 years, but I doubt it will be this low. We are in uncertain times and that is why the rate is so low currently. One thing to watch out for is if you payoff the HEL too soon, in the case of the lender I mentioned above, 24 months, then you will have to pay for all of the closing costs that lender incurred. This is a pretty standard practice, so if you don't want to pay for the closing costs and make it a truly no closing cost mortgage, then make sure you keep the loan open for 24 months or whatever timeframe your lender requires of you.

The second type of second mortgage is usually called a Home Equity Line of Credit, or HELOC. This is usually a variable interest rate which adjusts as the underlying index adjusts. Many HELOC's are tied to the Prime Rate, which is currently at a very low 3.25%, with an adjustment. Some institutions have a markup, others have no markup, and yet others have a prime -1% markup. As an example, the prime is currently 3.25%, and the lender mentioned above charges prime minus 0.50%. So that institution is currently charging 2.75% for their HELOC's. That is CHEAP money, I don't care who you are, because the effective interest rate is much lower once you take into account the tax benefits for the interest deduction on your taxes. This rate will fluctuate as the prime rate adjusts in this example. With the adjustment of the rate, the payment will also adjust.

Because the HELOC's are variable, they usually let the consumer pull money out of the Line of Credit as required for a fixed period of time. Once that time has expired, then the loan becomes a fixed rate and term loan like a HEL. So your payments will then include both the interest portion as well as the principal portion, therefore, paying down the loan amount. Your payments however will not adjust because the intent is to pay off your loan in the timeframe called for in the loan. Excluding the fixed portion, a HELOC operates much like a credit card. Some lenders actually issue a VISA or Mastercard branded card so that you can access your HELOC.

HELOC's usually also come with an annual fee. This is so ridonkulous in my opinion. The beauty of competition and a capitalist society is there are many different lenders out there who also in the name of competition do not charge an annual fee. I would suggest you go and find one of those lenders and get your loan through them. The lender I referenced above does not charge an annual fee.

In today's current credit environment, many people have been finding that their HELOC's have been cut because of a number of reasons given by the lenders. The home values in the neighborhood you live in could be decreasing and so the lender deems that your LTV has gotten too high and therefore decreases your available credit. The other thing is your credit profile has changed for the worst and therefore the bank wants to limit their exposure to you because of your changed economic situation. They will attempt to close or limit your HELOC availability because of this also.

The other thing that they have been doing is just plain outright closing the line of credit. Needless to say, these actions could not be coming at the worst possible time for you and other consumers I'm sure. The only way I know to prevent this from happening is to take out all the available cash in your Line of Credit. That way you have the cash in your pocket and the lender has no choice but to keep the loan open until you make payments or pay off the loan.

Many people shy away from HELOC's for whatever reason and I understand your debt shy or don't want the temptation or whatever. However, the best time to get your HELOC is when you are fully employed and can show that you can repay the loan. If you apply for a HELOC when you've lost your job, well, that's too late. Would you loan money to a consumer who had no employment and therefore no way to pay you back. Just smart decisions on the part of the bank in my opinion. So go and get that HELOC on your house assuming you have available equity and let it sit at $0.00 balance.

I mentioned that HELOC's were primarily tied to the Prime Rate set by the Federal Reserve board. While a majority of HELOC's I've seen are indeed tied to the Prime Rate, they are not all set to that index. There are many different index's available. There is the LIBOR index and even more rare, the 1 Year Treasury Bond HELOC. The Treasury Bond rates change weekly and are therefore very administratively intensive and cost more money to maintain, and therefore not very many lenders provide this index. The LIBOR rate is not very popular only because many people are not familiar with the LIBOR index. The LIBOR is an interest rate set by banks in Europe and is charged to banks that borrow money from other banks. The LIBOR is set in the morning, and can change throughout the day though. I'm sure there are lenders out there that can and do set their index's to other more exotic terms; I would suggest staying away from them as they are not readily advertised and may be difficult to track and understand. I like the easy stuff, and the Prime Rate is easy for me.

On top of the index, I mentioned earlier, different lenders will then have an adjustment on their index. That adjustment could be a subtraction on the interest rate, no change, or an addition to the prime rate. Regardless, the margin as it is referred too is also set depending on your credit score. If you have a high credit score, you are likely to get favorable terms. If you score is not that great, you may not get the most favorable margin setup. Regardless, your credit as always, determines how much in interest your going to pay on this money. To save money overall and not only in this transaction, keep your credit score as high as possible.

Second mortgages, or 2nd mortgages, depending on how you 'say' it, are a useful tool and they should be considered when you require access to cash locked up in your home equity. Beware however, that if you are looking at going the variable rate, or HELOC, route, get the line of credit when you don't need it, because no sane lender would or should lend you the line when you have no means of paying it back. The costs to acquire a second mortgage is pretty low to free because most lenders will pay for the costs to extend the loan to you, although some may charge a yearly maintenance fee which you should stay away from.