A second mortgage is one that is a loan that is taken after a first mortgage, regardless of whether or not the first mortgage has been retired. It is a secured loan that uses the house and the amount equity in the property as it basis. The amount available for the loan is determined by the current value of the property and the amount owed.
In general, second mortgages are assumed in order to pay for debt consolidation, home improvements, tuition, or emergency expenses. They run concurrently with the first mortgage and, in the event of default, must be paid off.
Interest rates for second mortgages vary according to the borrower’s credit rating and the prevailing prime interest rate at the time the mortgage is sought. Underwriting guidelines are a little more lenient for second mortgages, so acquiring one takes less time. Also, these mortgages have lower associated fees and costs, which may balance out a higher interest rate.
Payments are made on a monthly basis, like a first mortgage. It usually is a fixed rate loan with set monthly payments, although variable rate mortgages are available.
A second mortgage typically refers to a secured loan (or mortgage) that is subordinate to another loan against the same property. Second mortgages are subordinate because, if the loan goes into default, the first mortgage gets paid off first before the second mortgage. Thus, second mortgages are riskier for lenders and thus generally come with a higher interest rate than first mortgages.
In real estate, a property can have multiple loans or liens against it. The loan which is registered with county or city registry first is called the first mortgage or first position trust deed. The lien registered second is called the second mortgage. A property can have a third or even fourth mortgage, but those are rarer.
In most cases, a second mortgage takes the form of a home equity loan and the two are synonymous, from a financial standpoint. The difference in terminology is that a mortgage traditionally refers to the legal lien instrument, rather than the debt itself.
Generally, when considering the application for a second mortgage, lenders will look for the following:
-Significant equity in the first mortgage
-Low debt-to-income ratio
-High credit score
-Solid employment history
There are three typical types of second mortgage:
-Home equity loan
-Home equity line of credit
-Each of these has its own sets of regulations and requirements, and must be carefully considered before assuming one.
In addition to the abovementioned second mortgages, there are others:
125% second mortgage – If you qualify you can borrow funds, that combined with your first mortgage, in excess of 125% of the value of the property. This type of mortgage is a high-risk proposition, but if the conditions are right, it can be a good decision.
Piggyback second mortgage – This is a second mortgage, which is taken out simultaneously with a primary mortgage (thus piggyback). It is usually used when the borrower cannot raise enough capital for the down payment on the first mortgage, or when the buyer wants to avoid the higher interest rate that comes with a jumbo loan.
No Equity Second Mortgage – Under the right set of circumstances, you may be able to take out a loan on the value of your equity. But once you receive the money, your equity is reduced to zero – no equity.
The term length of a second mortgage varies. Terms can last up to 30 years on second mortgages, though repayment may be required in as little as one year depending on the loan structure.
A second lien holder can foreclose when a homeowner stops making payments to the second mortgage holder, even if there is no equity in the house. The second lien holder can foreclose even if the homeowner is making payments to their first mortgage holder. When a second lien holder forecloses, they do so subject to the first lien. The second lien holder may purchase the primary (first lien) mortgage (which may still be in good standing), but they are not required to do so. Regardless, if the second mortgage holder forecloses, this will result in the homeowner losing their home to foreclosure.
Each of these has its own sets of benefits and problems, and may or may not be the right option for your situation. Sitting down with a sound lending institution provides the greatest flexibility. By exploring all the variations of a second mortgage that are available, and understanding everything involved, you will be able to find the right fit.
MAIN DISADVANTAGES OF SECOND MORTGAGES:
The main disadvantage with second mortgages is that you are risking your home by using one. This is a serious risk: if you can’t pay the loan back, a second mortgage can be catastrophic. Make sure that your intended use of funds is worth the risk you’re taking by using a second mortgage.
Another drawback is that second mortgages have slightly higher rates than senior mortgage rates. This is because the second mortgage won’t be paid until the first one is (in the event of a default). Because the loan is riskier than a plain-vanilla mortgage, the rate is higher. However, the rate may be lower than alternative sources like credit cards.
Finally, you may have to pay hefty second mortgage fees. There are a lot of hoops to jump through and services to pay for. Depending on how much you need and how long you’ll need it, a second mortgage may not work simply because of the fees.
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