Understanding Second Mortgages - A Basic Guide
A mortgage is a loan taken against a home or any other property
. The initial mortgage taken to finance the home is known as the first mortgage. Second mortgages are secondary loans taken out against the same property, but the collateral is the equity owned by the homeowner. It is similar to home equity loans and the terms tend to be used interchangeably. If you require cash for some big expenditures, this could be a great way of securing it.
Reasons to take a second mortgage
You can choose to take a second mortgage on your house when you need money to renovate it, pay off other debts, or invest in other real estate deals. You can also use it to clear your first lien debts. Paying for a new car or your child's education is not unheard of either.
As home is an immovable and appreciating asset, taking out loans against your property is easy. In fact, you can even take more than two mortgages on your home.
Repayment of the loan
The loan repayment period can be a year or may go up to even 30 years. The loan can be repaid in monthly installments in which the interest and principal is usually combined. If your bank gives you the option, you can even make a balloon payment, which is paid once annually.
If the property owner fails to make the payments, the first mortgage dues are cleared first when the property is sold. Due to this, the interest rates on second mortgagesare higher. The interest rate on second mortgage can be fixed or variable.
Getting a second mortgage
You can take out a second mortgage from the same lender who gave you the first mortgage. The lender will check the state of your property and its market value before issuing the second loan. Alternatively, you can approach another bank or any other lending establishment for taking out the second mortgage. You will require an appraisal report on your home to apply for the loan.
Most lenders will take into consideration your credit rating, income and proof of a steady employment before approving the second mortgage application. They will also look into the details of your primary mortgage and repayment history. All this is done to assess your credit worthiness and ability to repay the new loan.
After assessing these details, a lender decides and communicates the amount of loan that can be sanctioned and the interest rate on it
The risk factor
While second mortgages are an easy way to avail financing, keep in mind the risks involved. If you take on high interest loans when you are not financially stable enough to repay them, you may end up having to declare bankruptcy and losing your property. Defaulting on your first or second mortgage also affects your credit rating, making it difficult to request loans from all types of lending institutions.
Understanding Second Mortgages - A Basic Guide
By: Jeff Livingston
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