Personal Finance And Second Mortgages
Once you have sufficient equity in your house you have a good source of collateral to obtain loans at competitive interest rates, in the form of a second mortgage. What is equity? Put simply, it is the value of the house less any outstanding mortgage on the house. In other words, if your property is now worth $250,000 and your mortgage is $100,000, then you have equity of $150,000.
As part of your financial planning, should you ever need to raise a loan you can now consider unlocking some of that equity. You can do that by applying for a loan that is also secured on your home, like the first mortgage. Not surprisingly, such a loan is referred to as a second mortgage.
The article below explains a bit more about second mortgages.
Second Mortgages
Understanding The Features Of A Second Mortgage
A second mortgage is a loan that is secured against the equity that you have already built into your home. Your first mortgage takes precedence over the second mortgage. In the event of a default, the first mortgage gets priority for the proceeds of the sale of the property. Only once the first mortgage lender has been paid, plus any expenses such as legal costs, can the second mortgagor receive any of the money from the sale. If the sale price is too low, then the second mortgagor does not get paid in full.
Historically, the combined total of debt from the first and second mortgage was restricted to 80% of the property value and below. This has been changing though. Record low interest rates, and a market for lenders, have created a situation where some lenders are approving second mortgages that, when combined with first mortgage balance, total as high as 130% of the home's value.
However, you should always bear in mind that your home is security for the loan, and you may lose it if you do not keep up the payments. You could be forced into a sale, which could be below the best market price. That could leave you with no home, and a big debt owed to the second mortgage lender. It is therefore best to keep borrowing against the property to 80% and less. That way, if ever you are forced into a sale, there should be enough to pay off all the debts, and some to spare.
Second Mortgages Normally Have A Higher Interest Rate
When setting the interest rate that a lender will charge for a home mortgage, they look at the risk level for loaning that money. This is the reason that a high risk borrower with a poor credit history usually gets charged a higher interest rate than a low risk borrower, with a good credit history.
It is exactly the same with a second mortgage. Furthermore, because the lender of the second mortgage is second in line to be paid, in the event of a default, and because there is a greater chance that there might not be enough equity in the home to pay off the second mortgage in full, second mortgages are usually given at a higher interest rate than are first mortgages; irregardless of who the borrower is.
Second Mortgage Payment Terms
Although you will have choices for terms when selecting your second mortgage, generally the terms given for second mortgages are shorter than those of a first mortgage. This is primarily because the amount of the second mortgage loan is usually much lower than that of the first mortgage.
Repayment terms second mortgage can vary considerably, so it is important that you look around for the one that is best for you. Usually they range in length from 2 – 20 years, with the majority of second mortgage loans being 5 – 10 years.
Just as the length of the second mortgage can vary, so can other repayment terms. The majority of second mortgages are repaid in equal monthly payments, with a portion of the payment going to interest and the rest to the principal balance, just like a standard first mortgage. However, some are different, such as those known as interest only or balloon mortgages. In that case your monthly payment will go only towards interest, and the entire principal will be due at the end of the term of the second mortgage.