Many people have reason to apply for a second mortgage, which refers to an additional home loan on the same property on which you already have one mortgage loan. If you own a home and find yourself in need of an infusion of cash – for instance, to pay for a wedding or unexpected medical expense – a second mortgage could be a useful tool for you. As with any financial scenario, each homeowner’s situation is unique. However, you’ll want to consider the following things before entering into a secondary mortgage loan agreement.
The Types
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, conversely, 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 rates.
The Terms
For lenders, it is a greater risk to approve someone 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. This is why second mortgages often come with higher interest rates, and some lenders also charge a fee up front to give themselves added protection.
The Value
It’s important to set your expectations because the cash value you actually receive through a second mortgage may be less than what you’re hoping for. This is because the amount 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 conservative.
While second mortgages offer both advantages and disadvantages, make sure you consider the above and investigate your options before taking the leap.
Image via Unsplash/Tierra Mallorca
