December 28, 2007, Newsletter Issue #96: Payoff Term of a Second Mortgage

Tip of the Week

While first mortgages come in two basic flavors, 15 and 30 years, second mortgages usually carry terms of 5 to 15 years. The repayment term may be specified by the lender, you may have multiple choices, or the particular loan you choose may require a certain repayment term. Much will depend on the amount borrowed and your debt-to-income ratio. You should select a repayment term that you can comfortably meet per your current cash flow.

If your second mortgage is a home equity line-of-credit (HELOC), repayment terms can be a bit more complicated. Many of these are interest-only loans, so a specific monthly payment, including some principal amount, is often not specified. While you will have the choice of how much, if any, principal will be paid each month, the entire outstanding balance will be due at some point in time, be it 5, 10, or 15 years. Therefore, you should plan how you will repay outstanding amounts before you find yourself in a “balloon” situation, where a large amount is due at the end of your loan term. Should you find yourself facing this situation, shop around for another second mortgage source in time to refinance this loan before the end of your repayment term.

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