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Many second mortgage loans are written with fixed rates, which are normally good for both borrower and lender. However, you have some other choices should you prefer different interest calculations that might work for you. There are a variety of adjustable rate second mortgages (ARM's) that will also serve your needs.
As with all ARM's, you must consider all the components, including the index, margin, adjustment interest rate cap, and lifetime interest rate cap. The components are particularly important with a second mortgage because there are many options that do not have the adjustment and lifetime cap protection that most first mortgage loans include. In fact, many home equity line-of-credit (HELOC) loans can adjust monthly and are tied not to popular first mortgage indices (U.S. Treasury Bill, LIBOR, or 11th District Cost of Funds), but to the U.S. Prime Rate, which can move up quickly in certain market situations. This fact doesn't make a loan tied to the prime rate a poor choice, but you must carefully analyze the overall terms of the loan to determine if it is right for you.
If you choose a HELOC, which is the best choice in many situations, you may not have the option of receiving a fixed rate. Since you control your own loan balance to a great degree, many lenders need the protection of keeping your interest rate at or close to current market since you are using their funds in a current time frame. As always, compare current fixed rates with the future possibilities of any ARM loan you consider to pick the right terms for you.
|Jennifer Mathes, Ph.D.|