Are you wondering whether a second mortgage is the right financial move for you? The term “second mortgage” usually refers to an additional home loan on the same property on which you already have one mortgage. If you own a home and find yourself in need of an infusion of cash – say, to pay for a wedding or unexpected medical expense – a second mortgage may be the right tool for you. As with any financial scenario, each homeowner’s situation is unique. However, the following information is important to know before entering into a secondary mortgage loan agreement.
Types of Second Mortgages
There are two common types of second mortgages available to borrowers: home equity loans and home equity lines of credit. With a loan, the lender will provide a lump sum of cash to be repaid over a set amount of time. Interest rates for these loans are usually fixed-rate. A line of credit, on the other hand, works more like a credit card. You may charge funds – or withdraw them by writing a check – as you go, spending only the amount you need at any given time. Lines of credit tend to have variable interest rates, rather than fixed.
Second Mortgage Loan Terms
When you take out a second mortgage, lenders are assuming a greater risk in approving you. This is because, if the borrower were to default on the home, the first mortgage lender will recoup their investment first. The second mortgage lender would be paid out secondarily with any remaining funds from the sale of the property. As such, second mortgages often come with higher interest rates, and some lenders also charge a fee up front to offer themselves added protection.
Cash Value
Be prepared for the fact that the cash value you may receive through a second mortgage may be less than what you’re hoping for, as it depends on a number of variables. The amount of equity you carry, your credit standing and the percentage of the property value that is already mortgaged will all factor into the cash value figure. Most lenders will grant you no more than 75-85 percent of your loan-to-value ratio of both mortgages combined, with some lenders being even more restrictive.
While second mortgages offer both advantages and disadvantages to consumers, always investigate your options before taking the leap. Ask questions of your lender and any others you’re considering and think ahead of time about your repayment plans.
Image via Unsplash/Austin Distel
