What is a Closed-End Second Mortgage?

Life is always unpredictable, but sometimes unexpected events come with unexpected costs. When this happens, you might consider tapping into the equity in your home to gain access to a large amount of cash fast.

A closed-end second mortgage is one such way of doing exactly that, allowing homeowners to use the money to pay for major repairs, debt consolidation, or other critical costs. This guide will cover everything you need to know about this type of financing.

A closed-end second mortgage loan (or CES loan) is a second mortgage that allows you to tap into your home equity without affecting the rate on your first mortgage.

Some types of second mortgages can be “open-end,” which means you can continue to take cash out up to the maximum limit and then draw again as you pay down the loan (not dissimilar from a line of credit).

But a “closed-end” second mortgage means you’ll receive the entire loan amount in one lump sum and won’t be able to withdraw any more cash after you receive the loan.

A closed-end second mortgage (sometimes called a closed-end home equity loan) will allow you to receive up to 80% of your home’s equity in a lump sum payment, though this depends on your credit score, income, and other factors.

You’ll typically be locked into a set loan term (e.g., 20 years), with monthly payments required for the duration of the mortgage loan. This setup makes this type of loan ideal for those who intend to remain in their home for a long period of time.

A closed-end second mortgage also has some restrictions. For example,  if you’re in the middle of paying off another loan that uses your home equity, you must seek the consent of your mortgage lender if you need additional financing.

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This type of loan gives homeowners quick access to large, lump-sum cash payments. And there’s no restriction on how you use this cash — you can use it to pay off debts, finance further education, or make major home renovations without having to use options like a personal loan.

If you take out a home equity line of credit (HELOC), you’ll most likely receive a variable interest rate. A closed-end second mortgage gives you the option of a fixed interest rate, which can be ideal if you lock in your rate when interest rates are low.

When using your home as collateral, you’ll have to ensure that you meet your required payments — otherwise, the lender can foreclose on your home.

Obtaining a second mortgage means you’ll have to pay for an appraisal, miscellaneous fees, and other closing costs. These can quickly add up to anywhere from 2% to 5% of the loan amount.

While it’s true that second mortgages offer fixed interest rates, they usually offer a higher interest rate than those found on a typical home equity line of credit (HELOC).

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There are many different forms of real estate financing available, including mortgage refinancing. But a second mortgage is very different from a mortgage refinance.

When you refinance your mortgage, you replace your existing mortgage with an entirely new one. This setup means that you’ll still have only one mortgage payment in the end.

You might consider a mortgage refinance to secure a lower interest rate, though a cash-out refinance allows you to convert your home’s existing equity into cash. If you do opt for a cash-out refi, then you’ll likely be paying a higher principal once the loan is made.

A second mortgage is exactly that: a second loan that exists on top of your existing loan. This setup means you’ll now be responsible for both loans, whereas a refinance deals only with one loan.

The advantage of a second mortgage is that, unlike a refinance, it doesn’t require you to change the interest rate on your first mortgage.

At DG Pinnacle Home Loans, our goal is to connect homeowners with the best financial options.

If you have questions about second mortgages or how to get started, feel free to contact us

One of our Loan Officers will be pleased to help you.

This article was originally published in www.crosscountrymortgage.com