What are Second Mortgages?
A second mortgage is a loan made against your home when you already own a primary mortgage. The home equity is used as collateral for the second mortgage loan.
Your second mortgage has less priority in comparison to the first on the identical property. So if you default you will want to clear your original loan before to paying off the outstanding balance on the second loan.
When do you select a second mortgage?
There are circumstances when you may cash out on your house equity by taking out a second mortgage loan.
* You may have compiled a large amount of debt through auto loans.
* There may be an opportunity for you to invest cash in a business.
* You may plan to avoid paying private mortgage insurance.
* You may wish to pay back debts and get rid of judgments, pay for your car, buy a vacation property or plan for a vacation.
How much are you allowed lend?
A second home loan allows you to lend on the basis of your home equity. The equity is the difference between the current appraised value of your home and the amount you have paid towards the first mortgage.
With most lenders, you can take a second loan such that the total loan-to-value ratio of your original and second loan is equivalent to 85% of the home’s appraised value. However, there are lenders in nearly all states excluding Texas and West Virginia who allow you to take out second mortgages equal to 125% of the appraised value.
What are the possible rates, terms and options?
The interest rates on a second loan are higher to that of the first loan. This is primarily because if you default, you will be paying off the first loan prior to that of the second and as such in that respect is a risk involved in offering second mortgages. You may select either a fixed rate home equity loan or an adjustable rate home equity line of credit as your second home loan option.
Common Second Mortgage Mistakes
Going for a second mortgage and handling it may not be difficult if you’ve already made a loan against your home. However, there are loopholes which you would surely like to avoid. So, prior to moving on with a second loan, receive a look at the 10 important mistakes which can spoil your deal and make things harder for you.
Not being aware of Home equity loans and Helocs
Home equity loans and Helocs are both second mortgages taken against your home equity. But one is a fixed rate loan for the most part while the other is an adjustable rate loan. Besides, the former grants you to receive the loan funds at a single payment, the last mentioned offers the credit line option where you can get advances until you don’t surpass the available credit limit.
Taking out a large credit line
Most often your credit line payments are determined on the basis of total credit liability even though there may be zero balance on your credit line. As such, a large credit line involves large payments which may impact your ability of repaying the second mortgage or other loans as well.
Not shopping enough for the best loan
You may decide to receive out the loan from a bank where you have a checking account. But if you wish to get the better loan for your needs, look out for one which can afford you some benefits and help you save due to lower rate of interest.
Not asking for Good Faith Estimate
It’s your lender’s responsibility to provide you with a Good Faith estimate after you apply. It assists you with a breakdown of the fees involved. So, you can be assured of not paying hidden fees and costs. If they don’t offer a Good Faith Estimate you most definitely should request one.
Thinking a Second Mortgage costs you less
You may have to pay less on a second mortgage than if you are managing a credit card. To know which is best, you need to think about the interest rate on the credit card and the actual rate on second mortgage after taking into account the tax deduction.
Trying For a second mortgage when you plan to Refinance
Lenders may not allow for a original mortgage refinance when you already have a second loan on the same property. They may look out for the combined loan quantity even if you refinance only the original loan.
Lenders may either ask you to pay off both the loans entirely or pay down the second loan when you refinance. However, they can provide you to keep the second loan only if you can get a subordination arrangement from the second mortgage lender.
Being unaware of Second Mortgage Tax Deduction
There may be cases when your home equity loan or heloc isn’t fully tax-deductible. It is better that you don’t depend on the lender for such selective information.
Use Heloc to pay back credit card debts
If you have made out a Heloc to pay back credit card debts, check that you don’t exhaust the available credit limit totally. You may later on find it difficult to make the payments in time thereby being unable to manage it.
Being unaware of prepayment penalty
There may be a prepayment penalty clause connected with your second mortgage and it can cost you a lot of money. So, watch out for the penalty if you are planning to sell or refinance within a short time.
Not knowing about life cap
Normally home equity lines of credit have life caps due to which the interest rate can go up much higher than expected and then you will have to make the payments accordingly. So, plan your budget and keep cash reserve so that you can use them just in time.
Be it debt consolidation or getting cash for repairs or paying off credit card debts, a second mortgage can be the best choice for your purpose. But you need to know the tips and traps so that you can utilize it in the best potential way.
How to get a second mortgage?
Taking a second mortgage is like to taking out a first mortgage on your home. You can simply fill out a no-obligation free short form to get quotes from the lenders. Then you should compare the quotes, find out the offer that can cost you less in comparison and provide all required paperwork while you apply for the loan. The lender will conduct an appraisal on your home in order to determine its current value and complete all the steps that are necessary to complete the loan processing so that he can arrange for the closing. At closing, you will be signing the note and other papers as required by your lender. You will have to pay closing costs like to that of your original loan.
What happens to the second mortgage if you refinance the first?
When you refinance the original loan after getting the second mortgage loan, you should ask your lender for a subordination of the second loan. This implies that your second home loan will be looked at as a junior lien compared to that of the refinance loan. Otherwise, if you do not subordinate it, the second mortgage will be made as the original lien and the refinance loan will receive over the second lien position. In this case, there will be less risk with the second loan but greater risk included with the refinance as a result of which the first mortgage refinance will cost you more in interest charges.
With a second home loan, you get the chance to tap a large sum of money. Moreover, you can deduct the interest on your taxes up to a certain limit. But you cannot overlook the costs and the high interest rate associated with a second loan. Besides, if you default on the second loan, you may lose your home. Therefore, before to going for a second mortgage, it is better to prepare a budget and find out how much you can afford to pay in addition to the first loan.
- All About Second Mortgages
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- About Home Equity Loans
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- Second Mortgage Lenders
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