Second Mortgage
As mentioned above, second mortgage is a subordinate loan. In case of default by the borrower creditor holding the subordinate loan has a claim on proceeds only after claims of the original lender are satisfied. Consequently second mortgage is riskier for the lender. Lenders demand a higher interest rate to compensate for higher risk. Second mortgages are also known as home equity loans. Second mortgages have gained popularity over the last few years. Previously second mortgage was a taboo phenomenon. Most lenders did not offer second mortgages. Very few lenders who did offer second mortgages did so at stringent conditions making them unaffordable for most potential customers. Having a second mortgage was a sure sign of financial difficulties and people tended to avoid it for as long as possible. This situation has changed drastically in the last few years. Most mortgage companies now offer second mortgages. Borrowers have a wider choice then ever before as various types of second mortgage loans are offered by a large number of mortgage companies. It has also becomes easier to get a second mortgage.
Second mortgages have also become more affordable because of fierce competition. Conventionally, market-lending rate was the minimum benchmark for interest rates on second mortgages. This is not the case anymore as second mortgages are often available at less than the market-lending rate making it a very lucrative option. Second mortgages are often available in three types of loans namely traditional second mortgage, home equity loan and home equity line of credit. Second mortgage may be a good option but before taking it consult with your current mortgage company if it will be willing to give you a bigger loan. This is always a better option. As with first mortgages never take the first second mortgage you come across. Thoroughly research and compare interest rates, prepayment penalties, default penalties and other conditions before deciding on an option. Especially avoid second mortgages with default or late payment penalties. Default or late payment penalties dramatically increase interest rates incase of late payment. Even though it may seem like a remote possibility it is not impossible. Second mortgages are usually bundled with hazard insurance, home insurance and home warranties that you may or may not need. Opt out of the insurance policy if you already have adequate cover outside of the mortgage because they offer no benefit and would cost you a large amount. The balloon payments feature makes second mortgages seem more attractive than the actually are. Balloon payments refer to a payment schedule that starts with affordable monthly payments that increase throughout the life of the loan.
You should always prepare a budget before taking a second mortgage, as you would have to pay processing and other fees upfront. Costs of a second mortgage include appraisal fees, payment for discount points if you opt for them, application costs and other closing costs including loan origination fees, administration fees, lender’s inspection fees, mortgage broker’s fees and tax services fees etc. A formal budget will guide your decision by comparing the additional costs incurred with savings you expect to accumulate over the life of your loan. Second mortgages are appropriate when you need more cash than your credit card limit immediately. Common reasons for undertaking second mortgages include home improvements or renovation, avoiding Private Mortgage Insurance (PMI), undertaking a debt consolidation plan and purchasing additional homes. Along with numerous advantages second mortgages also have a silver lining. The first and most important disadvantage of second mortgages is that you are risking your home. If you are unable to pay for any reason you will end up losing your precious home to the mortgage company. Another disadvantage is that second mortgages usually have higher interest rates than primary loans forcing you to pay more than you would in case of first mortgage. The last disadvantage of second mortgages is numerous processing and other fees that add up to a sizeable amount. Weigh in all your options and make a wise decision after careful deliberation!
The maximum amount of second mortgage available for your home depends on the basis of your home equity. Home equity is the different between current market value of your home and the amount you have paid to your mortgage lender. In simple terms it is the share (of your home) you have bought from the mortgage company for which you have made payments. Higher your home equity higher will be the amount of second mortgage available to you. Interest rate on your second mortgage depends on a number of factors including your credit score, total loan to value ratio and your home equity. Also second mortgages are usually offered than a shorter period in comparison with your first mortgage. If you decide to refinance your first mortgage what happens to your second mortgage? In case of refinancing your first mortgage make sure to request your lender for subordination of the second mortgage. Consequently, your second mortgage will be considered subordinate to your refinanced loan. However, if you do not ask your lender for subordination of the second mortgage your refinanced loan will be subordinated to your second mortgage increasing its risk and cost (i.e. interest rate). Borrowers often take a second mortgage even when they plan to refinance their first mortgage within a few years. However not all mortgage companies allow you to refinance your first mortgage if you have taken a second mortgage on the same property.
Another common mistake made by most borrowers is getting a hefty credit line that disqualifies you from taking further loans. This is because lenders calculate your monthly payments based on your credit limit and not the amount utilized. Even if you have zero balance on your (large) home equity credit line it may be difficult for you to qualify for further loans. We have gathered all the information about second mortgage on this webpage for the assistance of people looking for best mortgage.