Question:

Is there an interest only 2nd mortgage and how they work?

Answer:

Interest only 2nd mortgage loans do not require amortizing payments for limited time and after the 5 or 10-year term expires it is expected that you will repay the loan in a lump sum, or refinance. Otherwise payments will convert into fully amortizing high monthly principal and interest installments over a relatively short repayment term.

A home equity line of credit (HELOC) often resembles an I-O 2nd mortgage loan - they usually exhibit a draw period of 5, 7 or 10 years during which only interest on the spent amount is due. After the IO period ends, the repayment period requires fully amortizing payments of the amount withdrawn. HELOCs are often used as 2nd mortgages.

Why take IO second mortgage?

If you are taking interest-only second home mortgage, it is advisable that you have a specific purpose to do it. For example, you could do interest-only second to make home improvements and sell the house, or make an investment.

Home equity loans and second mortgages are in fact quick and cheap ways to tap equity. Equity is what you owe in the house translated in combined down payment and principal payments since you bought the house. Compared to unsecured and credit card debt, home equity loans may come cheaper but also use your home as collateral.

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