Prior to the early 2000s, almost anyone got a second mortgage to buy or remodel a home, or to pay education. And to this day, this tradition goes on. The only difference lies in the factors driving homeowners to take out a second mortgage: emergency medical, investments, debt consolidation or even transportation.
You may ask: What is a second mortgage? What are the features it carries? How to get it? Is it a good idea to take out a second mortgage? Read on, all the answers you need unfold.
What is a second mortgage?
A second mortgage, typically referred to a secured mortgage, is junior in position to an existing first one. Your property can have more than one mortgage. While a second mortgage is basically another mortgage secured against this property.
That is it; that is what a second mortgage is about in the final analysis. Go over your first mortgage, and you will get the picture.
Those who are uninitiated into the complexity of the process of mortgage are often taken aback by the idea of a second mortgage. They would usually ask: “What is this second mortgage all about?” Well, it would be difficult to understand the concept of a second mortgage if you haven’t gotten the gist of what a mortgage is.
A mortgage loan is basically a loan that you can secure through the use of your real property. The loan is usually documented and evidenced by a mortgage note. In simple terms, you use your real property as a guarantee for a particular loan. Most people use this to purchase their home; the loan basically allows them to have the money to purchase the house. In turn, the payment of the loan is guaranteed by the purchased house.
The Basic Idea behind Second Mortgage
But even though you have already used your real property to guarantee the payment of your loan, you could still use the same real property on other loans as a guarantee. Here lies the main idea of the second mortgage. The typical idea of a second mortgage basically refers to a mortgage (secured loan) that is subordinate or secondary to another loan.
Now you may be asking why the second mortgage is subordinate to the first loan. The subordination is not in time but in the prioritizing of payments for the loans. Let me explain this by saying that in case of a payment default, the first mortgage should be paid first, before the payment for the second mortgage can proceed.
The Disadvantages of the Second Mortgage that may be incurred by the borrower
The primary disadvantage of engaging in a second mortgage is that you are definitely putting yourself at great risk of losing your home. If you default in payment for the second mortgage, the risk in losing your home may be far greater. Likewise, you may find yourself paying exorbitant second mortgage fees if you get involved in a second mortgage.
Lastly, most second mortgages have higher rates as compared to the primary mortgage. Because of the higher amount of risk involved in the second mortgage, most lenders make it sure that the rates are higher than that of the primary mortgage. For these reasons, you should consider the consequences and risks involved before you enter into a second mortgage.
Types of Second Mortgage
The second mortgage has basically two types; first, there is the home equity loan; then there is the HELOC which refers to lines of credit. The home equity loan refers to the loan which has a fixed payment schedule. Example of this loan is the first or primary mortgage which is characterized by fixed interest rates.
The HELOC, on the other hand, basically permits you to have borrowings up to a certain credit limit. The “line” refers to the credit limit which is guaranteed by your real property. Likewise, the interest rates of HELOC are generally adjustable.
How much would a second mortgage allow me to Borrow?
The amount that you can borrow on your second mortgage is basically dependent on the equity in the lender and your real property. You can get the amount of the equity by subtracting the amount you owe on your home from the present appraised amount of your home.
Where can I avail of the second mortgage?
Most people would believe that they could only get the second mortgage from their primary loan lender. But this is a half-truth. You can definitely secure a second mortgage from different lenders. But it would always be a good idea to try to secure first a second mortgage from your primary loan lender so that you can save a few amounts of money on the rates and fees.
What the important Second Mortgage Facts are there?
Despite the similarities second mortgages share with common mortgages, they have distinctive facts.
In most cases, a second mortgage comes in the form of a home equity loan. You will be able to get a second mortgage once you build enough amount of equity in your home. The home equity is built through the due payments towards your first mortgage.
Subordinate to the first mortgage, your second mortgage can’t get paid until you pay off the first. As a result, second mortgages usually carry a higher interest for the higher level of default risk.
As with others, the term length of a second mortgage varies. It can last up to 30 years on condition that the repayment may be made in one year at least.
Your second mortgage lender has the right to foreclose when you stop making payments to the second mortgage. Therefore, you’d better make sure you are able to pay off another mortgage besides the existing one. After all, it is your home with which you secure the second mortgage. And the last thing you want is foreclosure if you are taking out a secured loan.
How to get a second mortgage?
Getting a second mortgage requires the same process as getting the first one. You will complete all the necessary financial paperwork, personal information. You must get a home appraisal, and give the new or the same lender necessary information so that he can decide whether to finance your second loan or not.
In the same manner, fees are involved when getting a second mortgage. It’s an entirely new loan, which requires loan origination fees, appraisal fees, and closing costs.
However, it is not always easy to obtain a second loan. Lenders will be willing to give you such a loan if you have
- More than enough equity built on the first mortgage
- High credit score
- Solid employment history to prove your ability to pay back the new loan
- Low debt-to-income ratio
- Credible reasons to prove you need this new loan, such as education expenses, home improvement work or medical spending
Taking out a second mortgage allows you to get the needed money to do what you want. More importantly, it means undertaking another financial responsibility. You will have two sets of payments every month instead of a single one.
You will have to make due payments on both the two mortgages on time to avoid default and foreclosure. So a word of advice: think twice before you do. Make sure you need it and you can afford it.