Second Mortgages

Second Mortgages – Are They Good Financial Solutions?

You can take advantage of all kinds of financial products designed to help you manage your finances including second mortgages. Given the recent collapse of the property market and the widespread financial crisis, these loans declined in popularity, but now, as the recovery in both the real estate and financial sectors is in full swing, consumers gain more confidence and go back to these products. Find out what such a loan has to offer to decide whether it will be useful to you.

Second Mortgages Basics

Let’s start with the very basic point here. What is a mortgage? This is a type of secured loan. It is secured with your property.

A second mortgage is a loan which uses the equity in your home as collateral. Basically, you borrow against the equity that you own in your house. The term “second” is used to refer to the fact that if you default on this loan, the proceeds from the sale of your home will be used for repaying the debt on the original mortgage first. The remainder will be used for the settling of the second loan.

Apart from this, there is no difference in the way in which first and second mortgage will work. Of course, the two are taken out for different reasons. The first loan is used for the purchase of the home. The second loan is typically used for financing a large investment. Most people take out such a loan to finance repairs which will boost the value of their home and consequently the size of their equity. There are also those who use the funds to finance a major purchase or the education of their children.

Mortgage Amount

There are a number of factors which determine how much you can borrow with a second mortgage. The main one is the equity that you have in your home. The larger this equity is the more you can borrow. The equity, on the other hand, depends on the value of your property and on the repayment of your first mortgage. The loan to value ratio is another major determinant of the loan amount. This is the percentage of the property which is mortgaged.

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Loan Type

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Your credit score will also affect the loan amount. The higher it is the more you can borrow. At the same time, it is easier for people with low credit score to get this type of loan since they place valuable collateral – their home. You should certainly consider such a subprime mortgage if you have financial difficulties.

Interest Rates

The interest rates on second mortgages are higher than on senior (first) ones. This is because the lender assumes a greater risk given that the senior mortgage will be repaid first in case of default. Still, you can expect the interest on such a secured loan to be lower compared to those on unsecured loans available to consumers.

There are two types of second mortgages depending on the way in which the loan amount is extended and on the way in which interest is charged. There are the traditional home equity loans with which you receive a lump sum. They typically have a fixed interest rate. There are also home equity lines of credit. These work like credit cards in the sense that you can take out as much money as you need up to the set limit at any given time. The lines of credit usually have adjustable interest rates.

Fees

The fees for these types of loans are quite high. The closing costs are typically from 3 to 6 per cent of the total amount that is borrowed. There can be various penalty fees as well such as ones for early second mortgage settlement. In addition, you have to consider costs such as private mortgage insurance premiums.

Getting a Second Mortgage

As a start, you should figure out where you stand as a borrower, how much money you need and what monthly installments will be affordable to you. You can answer these questions with the help of a mortgage calc. Try to use a mortgage calculator with taxes for best results. Once you have defined your search criteria, you can readily compare quotes from different lenders. Remember that you are not restricted to borrowing from the lender that has extended your senior mortgage.

When you pick the ideal one from the different second mortgages available, you can make a mortgage application.

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