Funding Options for Home Buying: Second Mortgages, Bridge Loans, HELOCs and More
Let’s Talk Funding Options: Understanding Second Mortgages, HELOCs, and Bridge Loans
Home buying isn’t what it used to be — buying markets are fiercely competitive, and the days of needing a 20% down payment are long behind us. Today, there is a range of funding options for both first-time and seasoned home buyers. But without a bit of background, loan acronyms and mortgage jargon can be overwhelming.
Fortunately, we’ve done our research and we’re well versed in funding options from A-Z, including: second mortgages, bridge loans, HELOCs, and more.
If you’re ready to get creative about funding your next home purchase, Options is here to help. At the end of the day, it’s all about making the right funding decisions for you. If you’re thinking of using a second mortgage or an alternative loan option to fund your home, here’s what you need to know.
The Advantages of Using a Second Mortgage for Home Buying
Simply put, a second mortgage is a loan that is placed on a property that already has a claim against it. Often, homeowners will consider taking a second lien, or a junior lien, out on their home once it has accrued a decent amount of equity.
As home values rise over time and markets become more competitive, second mortgages can serve as vehicles to fund costly renovations, which are especially advantageous if you’re looking to flip your property and build value quickly.
A couple of “pros” worth considering: second mortgages offer homeowners the opportunity to borrow large sums money, at times reaching upwards of 75% of a property’s value, with interest rates that aren’t unreasonable.
Additionally, a second mortgage can help fund other bills, like high-interest debt or student loans, when you’re ready to tackle other costly life expenses.
“Cons” to note: as a responsible homeowner, you already know this, but it’s important to remember that loans aren’t just free money. Lucrative second mortgages need to be approached with a strong understanding of your personal finances, as too many missed payments on a second mortgage could result in foreclosure.
If you’re not sold on taking out a second mortgage on your home, there are a few other options to consider.
Expanding Horizons: Bridge Loans Also Help Buyers Fund Their Homes
If you’re in the unique position where you’ve found your dream home but you’re already a homeowner, a bridge loan is another borrowing option that lets buyers “bridge the gap” between buying and selling a home. Typically taken out for a short period of time (ranging from a couple of weeks to a few years), a bridge loan gives buyers the flexibility they need to buy a home before selling their existing home.
Unlike second mortgages, bridge loans don’t require that you already have a substantial amount of equity built into your home. Instead, you opt to pay a higher interest on your bridge loan.
While the convenience of a bridge loan can help buyers sail through homeownership transitions, it’s important to work with a mortgage advisor to understand all of the associated fees throughout the process.
More Choices: You Can Also Opt to Open a HELOC
Similar to bridge loans, HELOCs (Home Equity Lines of Credit) can serve to provide the startup funds necessary for buyers to purchase a new home ahead of selling an existing property. But a HELOC more closely resembles a second mortgage in that it requires you to already have a great deal of equity built in to your existing home.
Still, there are a couple of key differences between a HELOC and a second mortgage worth knowing about.
For starters, you can think of a HELOC as a credit card: you have a certain amount of money available to you, and you can spend that money only until you hit your limit. If you’re planning to pull mon
ey out for small home renovation projects over time, a HELOC is a great way to fund home improvements, if you stay on top of your payments.
With a traditional second mortgage or a home equity loan, however, you receive a one-time lump sum that can be applied towards home expenses or other substantial expenditures like college tuition or a wedding. The loan is then paid off over a fixed timeline with a pre-set interest rate, just like your first home mortgage.
All Options on Deck — Choosing the Right Funding Choice for Your Home
Here at Options, we know that mortgages aren’t one-size-fits-all undertakings. We’re ready to work closely with you to determine which home funding options represent the right fit for your individual circumstances.
With a better understanding of who you are, we can make educated recommendations on second mortgages vs. bridge loans and HELOCs, to help you attain your ultimate goals.
Photo Credit: Tony Webster