A 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
The two most common types of second mortgages available to borrowers are 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.
Terms
Lenders are assuming a greater risk when they approve a consumer for a second mortgage. 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.
Value
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.
Second mortgages offer both advantages and disadvantages to consumers. 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 Flickr/Brent Rangen
