A second mortgage is commonly referred to as a home equity loan. It is basically a loan on a property already on a mortgage. The surety of a second loan is the mortgaged property associated with it. Below are a number of frequently asked questions about second mortgages.
1. What Is the Difference Between a First and a Second Mortgage?
A second mortgage loan is secured by a home that is already under a mortgage. The interests on a second mortgage are usually higher than those of the first mortgage. This is because a second mortgage presumes a higher risk for the lender.
2. Can I Get a Second Mortgage on Bad Credit?
While having a bad credit rating does not prevent you from securing a second mortgage, it might lock you out of the lowest interest rates. However, if you have a good mortgage adviser, they can help you navigate the bad credit pitfalls and get the best possible rates for you.
3. How Much Can I Borrow on a Second Mortgage?
Second mortgage loans amounts are usually high. You can take a second mortgage to do major renovations on your house so as to increase its value. For smaller loans, it is advisable to take a personal loan, in which you case you don’t need to secure it with your home. You can borrow as much as the difference between the value of your property and the remaining balance on your first mortgage. This is called your home’s equity, or, in simpler terms, profit.
4. Should I Inform the First Mortgage Lender Before Taking a Second Mortgage?
Yes. The first mortgage lender has to okay your request for a second mortgage. Without this clearance, you may not be able to secure a second mortgage. You will also need to disclose to your second mortgage lender the full details of your first mortgage.
5. What Are Some of the Best Uses of a Second Mortgage?
You might want to take a second mortgage to make home improvements. This has the effect of increasing the value, and hence the equity, of your home. You could also take out a second mortgage to consolidate your debts with a view to securing better terms and lower interest rates. Other reasons include taking out a second mortgage to start a business, buy a second home, or work on any other project. You can take out a second mortgage for any purpose if your home equity allows it, and as long as you can afford to repay it.
6. What Would Happen If I Default?
Should you default on paying your second mortgage, a lender with a lien on your property can foreclose your home before selling it to pay off owed debts. For this reason, never take a mortgage if you know you may not be able to pay for it. Once the home is foreclosed and sold, the first mortgage lender is paid first. If your home has a higher equity, there’s a likelihood that the proceeds will be enough to pay off the two mortgages.
7. What Are Some of the Risks of Getting a Second Mortgage?
The first obvious risk is the loss of your home should you default. Before you sign on the dotted line, you must be sure of your ability to repay the loan as stipulated in the contract. If you feel the terms are unreasonable, do not proceed as this may be an indication of a potential foreclosure on your home.
Never make a decision to apply for a second mortgage on a whim. Whereas it can potentially help you deal with pressing issues such as renovations, debts consolidation, among other projects, make sure to look for a second mortgage lender with the most favourable terms. Besides, it is important to understand what you are getting yourself into before signing up the contract.