If you need extra money for home improvements, debt consolidation, or even to buy an extra home, a second mortgage could be exactly what you’re looking for to make that happen. However, when you hear the term second mortgage, you may not be sure exactly what it means. Simply put, it’s just another mortgage on your current home. Basically, you are borrowing money for one or more reasons and using your house as collateral.
The term “second” means that the loan you are taking does not take precedence over your home if for some reason you cannot pay it back on time. In all cases, the initial mortgage on your home will be paid off before the money goes toward the second mortgage payment. With that being said, the next question is why in the world would someone put up their house as collateral in exchange for money? Well, the answer is that you shouldn’t unless you are in a situation where you need a large amount of money quickly.
Western Vista Federal Credit Union in Wyoming notes that a “second mortgage is what it says on the tin: the second loan against a specific piece of property. Consider this example: Let’s say you have a first mortgage on your home. The value is $100,000 and you have a $60,000 balance to pay on your loan. The $40,000 difference is considered equity, or the part of the house that you own outright. If you want to borrow more against that $40,000, you would be taking out a second mortgage on the house in To do so. Why borrow against this principal? In many cases, the interest rate you pay on your mortgage is lower than many other types of loans. Interest is also often tax deductible for a first or second mortgage, but not necessarily for a car loan or a credit card.
When a person borrows money against their home, a large part of the change is used as collateral and also allows the borrower to obtain a larger loan. There are some downsides to second mortgages, like the fact that you’re putting your home at risk in case something happens and you have trouble paying the second mortgage.
Take a look at the interest rate on a second mortgage, too. You can probably expect the rate to be a bit higher because it’s riskier for the lender who knows that if a default occurs, the primary mortgage is paid off first and then the second mortgage. You can also be picky about a second mortgage, so consult more than one source when trying to make a decision. Also watch out for balloon payments, which is a payment that starts low and increases over time. If possible, choose a fixed interest rate. Also keep in mind that second mortgages, like any other loan, have additional closing costs. There are appraisal fees, application fees and other closing costs that can be just as random as title searches.
At Mortgage101 they say, “Many companies charge a fee to lend you money. The fee is usually a percentage of the loan and is sometimes called “points.” One point equals one percent of the amount you borrow. For example, If you were to borrow $10,000 with a rate of eight points, you’d pay $800 in “points. The amount of points mortgage companies charge varies, so it may be worth shopping around.”
You’ll also want to make sure you get a second loan that allows you to keep your first mortgage.
In the long term, second mortgages are a good bet for home improvement financing, and some second mortgages can extend for as long as 20 years. Remember, though, that it’s not just home equity lines of credit that don’t describe the amount of monthly payments, so read your contract. There are many second mortgage loans that either. Joe Prussack notes, “Everyone likes low monthly payments… These popular second mortgages also often have adjustable rates, so these loans are not for the faint of heart.” In this case, if you’re one of the faint-hearted, stick with a fixed interest rate instead of one of the variable rate loans. This way, you’ll know exactly what payments are expected each month, whether it’s for a second mortgage or another type of loan, to secure an important item you’ve needed for the past few years.