What is a Second Mortgage?
A second mortgage loan is actually similar to a home equity loan because you are borrowing against the equity in your home/property. The maximum amount generally provided by second mortgage lenders is based on the following:
(Appraised value of your house x 80%) – existing first mortgage balance
The first mortgage remains in place. In the event of default, the original mortgage would receive all proceeds from the liquidation of the property until it is all paid off. Since the second mortgage would receive repayments only after the first mortgage has been paid off, the interest rate charged for the second mortgage tends to be higher.
Who Should Consider a 2nd Mortgage Loan?
People who are in need of funding for major expense might consider a 2nd mortgage a better form of loan than a home equity loan. The second mortgage can be used for a variety of things, from the purchase of a new car, to sending a child to college, making an addition to your home or starting a new business. Second mortgages also can be used to consolidate debts, including high interest rates credit cards.
Advantages of a Second Mortgage Loan
- Interest may be tax deductible
- Ability to borrow larger sums of money. It is a form of refinancing your home
- Bad or poor credit does not matter. The money is being loaned on the basis of equity value of the home.
Disadvantages to a Second Mortgage Loan
- Interest rates are slightly higher than standard home equity loans
- Repayment of second mortgage loans have to be met or you risk losing your home. The reasons why this money is needed should be vitally important and not a whim.
- You may have to pay hefty second mortgage fees. There are a lot of processes to go through and service fees to pay for.
Where to Find Second Mortgages
Second mortgage companies can be found almost anywhere. These are the large loans that lenders love. A good way to start is with an institution you’re already working with – like your existing bank or credit union. The mortgage lender holding your primary mortgage might also be agreeable to providing the second home mortgage. By doing this, you might hopefully save a few dollars on fees.
Second Mortgage Lenders
Companies that provide home mortgage loans are banks, conventional mortgage brokers, credit unions, and some private mortgage lenders. While a second mortgage might be riskier for a home owner, it is far safer for a second mortgage lender. As mentioned above, the primary source used to base the 2nd mortgage loan on is the equity in the home.
The FHA is another source of second mortgage home loans, although it can take much longer to obtain and have more steps involved. FHA loans also might not provide the higher loan amounts a home owner requires in a second mortgage.
Second Mortgage Costs
How to search for a second mortgage home loan:
- The APR – Always go to at least three second mortgage lenders, including banks and conventional mortgage brokers. Shop around for the lowest mortgage rates.
- Avoid 2nd mortgages with default penalties – These penalties are applied when you miss a payment and can add enormously to your 2nd mortgage interest rate.
- Insist on no prepayment penalties - Flexibility is important in a second mortgage.
- Avoid second mortgages that have voluntary insurance coverage bundled into them - adding to the cost of the mortgage loan.
- Ask about any balloon payments that might be in the cost of the loan.
What is included in the closing costs of a second mortgage home loan:
- Appraisal Fees
- Points (Definition: A percentage of the loan amount. If you borrow $100,000, one point is equal to $1000 (or 1% of $100,000). It is possible to pay points up front to "buy down" your interest rate and make your monthly payments smaller.)
- Application Costs (probably non-refundable)Other closing costs – Title search, document stamps and other forms of closing costs that will have to be paid at closing.