Second Mortgages Can Be Good Financing Options
The recent economic downturn has left many of us financially quite vulnerable and many of us are still feeling the pinch of difficult finances
. If you have also found yourself in such a situation where you now have a lot of debt and yet need additional funds,
second mortgages might be of help. Second
mortgages are additional mortgages on properties where primary mortgages already exist. These are secured against the same equity as the first mortgages. Therefore the amount of a second mortgage is generally based on the property's current value and the amount that is still owed. They are usually given out by the lender of the first mortgage, but can be obtained from a different lender.
But before you think about getting a second mortgage, you may like to consider the possibility of a more economical way to consolidate some debt. In order to do this, you may like to refinance your first mortgage. But this can only makes sense if you are able to refinance at a lower rate of interest than what you currently have on your existing mortgage and present debts, such as your credit cards. In case refinancing is not available to you, you may then like to consider getting a second mortgage.
A second mortgage can help relieve stress from financial crisis by allowing you access to your home's equity. If the funds made available from a second mortgage are used to make repairs or enhancements on a home, the value of the property may increase, which may be a benefit of such a financing option. In any case, a second mortgage can always be used for other non-related financial situations, such as paying off college tuition or lowering your debt load. While this type of mortgage can be used for any purpose, it is advisable that you apply the money you need to first pay off all existing debt before you do anything else with it.
Second mortgages are generally of three types: A traditional mortgage, which usually has a fixed rate and a term of 15- 30 years; a home equity line of credit, where the rate is typically adjustable and the funds can be drawn as needed; and a home equity loan in which the borrower uses the equity of his or her home as collateral.
In many cases these mortgages are granted at higher rates than those for first mortgages. This is due to the fact that the lender of the second mortgage normally enters into a situation with a higher risk of default. This increased risk may not directly be related to the credit of the borrower, but rather to the availability of funds the borrower can claim. In the event of
mortgage foreclosure due to defaults on the mortgage payments, the proceeds of the foreclosure would be applied to the repayment of the loan amount. Primary mortgages will take precedence over secondary mortgages and therefore the borrower has to await the settlement of the first mortgage before any leftover proceeds can be claimed.
A second mortgage not only comes with a higher interest rate, but is also usually written for a shorter term than that of the first mortgage. Therefore, it is advisable that you take all precautions to ensure that the mortgage is repaid on time and that you take all the necessary steps to
stop foreclosure. Also, while shopping around for competitive mortgage lenders and banks, it may be a good idea to carefully weigh all the risks and research the various options available to you before you take your decision.
by: Ask Bill
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