Potentially High Loan Amount
Second mortgages allow you to borrow significant amounts. Because the loan is secured by your home , you have access to more than you could get without using your home as collateral. How much can you borrow? It depends on your lender, but you might be able to borrow up to 80% of your homes value. That maximum would count all of your home loans, including first and second mortgages.
The Risks And Alternatives
As a second mortgage works very much like your first mortgage, your home is at risk if you dont keep up the payments. Like any mortgage, if you get into arrears and dont pay it back, additional interest can mount up.
If you sell your home or its repossessed, the first mortgage gets cleared in full before any money goes towards paying off the second mortgage. However, be aware that the second mortgage lender can pursue you for any shortfall.
Second Mortgage Vs Refinancing: How Are They Different
Now be careful not to confuse a second mortgage with a refinanced mortgage. A second mortgage comes with a second monthly payment along with your current monthly payment.
Meanwhile, refinancing means youre replacing your current mortgage with a new mortgage that has a different set of termsso you stick with only one monthly payment.
With a second mortgage, your primary lender holds the lien so if you stop making payments , they can take back your house .
Your second lender only gets their money back if your primary lender gets all their money back from auctioning off the house.
All this to say, your second lender is taking on a higher risk and will probably charge you a higher interest rate as a result compared to doing a refinance.
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What Does Taking Out A Second Mortgage Mean
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Taking out a second mortgage means getting another loan–in addition to your original mortgage–that uses your home as collateral. Because your house is on the line, the stakes are high if you choose to take out a second mortgage. It is important to consider the financial implications of the new loan, the types of products available and your intended use of the money.
How To Get A Second Mortgage
Shop around, and get quotes from at least three different sources. Be sure to include the following in your search:
- A local bank or
- A mortgage broker or loan originator
- An online lender
You can prepare for the process by getting your documents ready. That will make the process much easier and less stressful. You’ll need information like income, mortgage balance, and more. Ask the lender what they would need before you apply for the loan.
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Types Of Second Home Mortgages
Lets look at two forms of second mortgages:
- Home equity loan. With a home equity loan, your lender gives you a stack of money based on your equity, and you repay the lender every month. Because its a one-time lump sum, home equity loans come with a fixed interest rate, so monthly payments dont change.
- Home equity line of credit . A HELOC is when your lender allows you to borrow a large amount of your equitybut not as a lump sum. Its more like a credit card where you have a borrowing limit, and you only pay for the amount you borrow. After the borrowing time frame has ended, you must pay off your accountor else your lender will take your house!
How A Silent Second Mortgage Works
Silent second mortgages are used when a buyer can’t afford the down payment required by the first mortgage. They allow a borrower to purchase a home that they otherwise would not have been able to afford. Silent second mortgages from undisclosable sources are illegal. However, a number of legal down payment assistance programs sponsored by government agencies do exist to provide down payment funds from acceptable sources.
When a buyer purchases a home, the arrangement requires the borrower to provide a down payment. A lender will typically request that the borrower completely disclose the sources of down payment funds when completing a mortgage deal. Fraud or illegal actions can occur when a second mortgage is used to fulfill the obligation of the down payment without being reported to the lender. In this situation, silence refers to a lack of transparency and disclosure.
For example, let’s say you wish to purchase a house for $250,000. You have secured a mortgage for $200,000, which requires a down payment of $50,000. You dont have the full $50,000 in cash or liquid assets for the down payment you only have $10,000. So you decide to take a silent second mortgage of $40,000. The original lender believes your down payment to be $50,000 when it is actually only $10,000 .
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Why Take Out A Second Mortgage
There are several reasons why someone might take out a second mortgage:
- If youre struggling to get some form of unsecured borrowing such as a personal loan, perhaps because youre self-employed.
- If your credit rating has worsened since taking out your first mortgage, remortgaging to a new mortgage to cover your house loan plus a further loan could mean you end up paying a higher interest rate on the whole new mortgage so you will pay more interest overall. Taking out a second mortgage means you would only be paying the higher rate and extra interest on the new amount you want to borrow.
- If your current mortgage has a high early repayment charge, it might be cheaper for you to take out a second charge mortgage rather than to remortgage to release equity from your property .
The suitability of the examples above will depend on your personal circumstances. Provided youre up to date on your mortgage payments, its worth considering a further advance from your existing lender on better terms as it might be a better option.
Interest Rates And Fees If You Borrow On Amounts You Prepaid
You pay either a blended interest rate or the same interest rate as your mortgage on the amount you borrow. A blended interest rate combines your current interest and the rate currently available for a new term.
Fees vary between lenders. Make sure to ask your lender what fees you have to pay.
You may not have to make any changes to your mortgage term.
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What Is A Second Mortgage
A second mortgage is a type of subordinate mortgage made while an original mortgage is still in effect. In the event of default, the original mortgage would receive all proceeds from the property’s liquidation until it is all paid off.
Since the second mortgage would receive repayments only when the first mortgage has been paid off, the interest rate charged for the second mortgage tends to be higher, and the amount borrowed will be lower than that of the first mortgage.
Using a mortgage calculator is a good resource to budget these costs.
When Should I Get A Second Mortgage
Second mortgages arent for everyone, but they can make perfect sense in the right scenario. Here are some of the situations in which it makes sense to take out a second mortgage:
- You need to pay off credit card debt. Second mortgages have lower interest rates than credit cards. If you have many credit card balances spread across multiple accounts, a second mortgage can help you consolidate your debt.
- You need help covering revolving expenses. Do you need revolving credit without refinancing? Unlike a refinance, HELOCs can give you access to revolving credit, as long as you keep up with your payments. This option can be more manageable if youre covering a home repair bill or tuition on a periodic basis.
- You cant get a cash-out refinance. Cash-out refinances, compared to home equity loans, usually have lower interest rates. But if your lender rejects you for a refinance, you may still be able to get a second mortgage. Consider all of your options before you get a second mortgage.
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Differences Between Second Mortgages And Refinancing
Second mortgages tend to have higher interest rates than cash-out refinances. However, closing costs are typically higher for a cash-out refinance than for a HELOC or home equity loan.
While a second mortgage is an additional loan to your first mortgage, a cash-out refinance is a single, larger loan. You will have another payment to make when you get a second mortgage. And with a second mortgage, equity in your home may be only partially accessible. With a cash-out refinance, you may have the option to access all of your homes equity.
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Why Would I Need A Second Mortgage And How Do I Qualify
A second mortgage can be a great way for homeowners to consolidate debt. Though second mortgages often carry higher interest rates than first mortgages, these rates are still often lower than high interest credit cards, car lease payments or unsecured lines of credit.
If you use a second mortgage to consolidate debt and help you meet other financial commitments on time, this can improve you credit score and allow you to qualify for a mortgage with a prime lender sooner.
In order to qualify for a second mortgage in second position, lenders will look at four areas:
- Equity. The more equity you have available, the higher your chances of qualifying for a second mortgage will be. If you are purchasing a house, a larger down payment also decreases the risk that a lender takes on. Regular payments towards utilities, telecommunications, insurance, etc, and/or confirmation letter from service provider.
- Income. Lenders want to verify that you have a dependable source of income to ensure that you can make payments.
- Property. Because other factors are risky , lenders need to secure their investment in case you are unable to keep up with mortgage payments.
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Is A Second Home Mortgage Right For You
A loan to purchase a home is usually the first mortgage lien recorded on a property subsequent loans depend on the amount of owners equity in the home and generally require a new appraisal. Homeowners may use the money from these second mortgages available as a lump sum home equity loan or as a home equity line of credit for any purpose. Deciding which loan is right for you depends on the loan’s purpose and your personal spending habits.
How Borrowing On Home Equity Works
You may be able to borrow money secured against your home equity. Typically, interest rates on loans secured against home equity can be much lower than other types of loans.
Not all financial institutions offer home equity financing options. Ask your financial institution which financing options they offer.
You must go through an approval process before you can borrow against your home equity. If youre approved, your lender may deposit the full amount you borrow in your bank account at once.
You can borrow up to 80% of the appraised value of your home.
From that amount, you must deduct the following:
- the balance on your mortgage
- your total HELOC amount, if you have one
- any other loans secured against your home
Your lender may agree to refinance your home with the following options:
- a second mortgage
- a loan or line of credit secured with your home
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Reasons To Take Out A Second Mortgage
- To extend financing
- To avoid mortgage insurance by breaking the loan up into two
- To keep the first mortgage at/below the conforming limit for a lower interest rate
- To fund home improvements, pay for college tuition, pay off an auto loan
- For debt consolidation
- To have an emergency source of cash at the ready
- To fund an additional home purchase
One final note: Many mortgage lenders have reduced the availability of second mortgage programs in recent years as a result of the prior financial crisis, so you may find it much more difficult to obtain one these days.
But second mortgages are still around, and can be found at a variety of banks, lenders, and credit unions nationwide. The only difference now is that the LTV is often restricted to say 85-90%, versus 100% during the housing boom.
At the same time, there are still crazy loan programs that allow folks to get a second mortgage with no equity in the home, like 125% second mortgages being offered by CashCall. So theres plenty out there if youre willing to pay a premium for it.
How Much Stamp Duty Will I Pay
Standard Stamp Duty rates range from 2%-12% of the property price. Itâs only paid on properties over £125,000.
If you buy an additional property, youll have to pay an extra 3% in Stamp Duty, regardless of how much the second property costs.
From the 1st April 2016, anyone whoâs bought a second property in addition to their main home will pay:
- An additional 3% for the first £125,000
- 5% on a property which costs between £125,001 and £250,000
- 8% on a property which costs over £250,001.
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Home Equity Line Of Credit
Home equity lines of credit, or HELOCs, dont give you money in a single lump sum. Instead, they work more like a credit card. Your lender approves you for a line of credit based on the amount of equity you have in your home. Then, you can borrow against the credit the lender extends to you.
You may receive special checks or a credit card to make purchases. Like a credit card, HELOCs use a revolving balance. This feature means that you can use the money on your credit line multiple times as long as you pay it back.
For example, if your lender approves you for a $10,000 HELOC, you spend $5,000 and pay it back. Then, you can use the full $10,000 again in the future.
HELOCs are only valid for a predetermined amount of time called a draw period. You must make minimum monthly payments during your draw period as you do on a credit card.
Once your draw period ends, you must repay the entire balance left on your loan. Your lender might require you to pay in a single lump sum or make repayments over a period of time. If you cannot repay what you borrowed at the end of the repayment period, your lender can seize your home.
S To Get A Second Mortgage
The steps for getting a second mortgage are much the same as getting a first mortgage when you buy a housethe key difference with second mortgages is that you already own the property.
Borrowers who want a HELOC or home equity loan should follow five basic steps:
Its also important to note that different lenders have different fees they charge throughout the loan process. Some lenders have application fees they charge upfront, while others have appraisal or title fees that dont get paid until the loan closing. In some cases, you even can finance these closing costs. Just know those costs will be tacked on to the balance of your loan when you closeand youll be paying interest on those fees throughout the life of the loan.
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What Is The Difference Between A Second Mortgage And Refinance
A home is a place to live, an asset and a potential source of cash to cover upgrades, repairs or emergencies. If you want to leverage your homes equity to cover major costs, you may want to refinance your mortgage or secure a second mortgage. When you are considering a second mortgage vs. a cash-out refinance, weigh the pros and cons of both to determine which may be the right option for you.
Home Improvements Or Renovations
, CEO of Rent to Own Labs, says one of the best reasons to consider a second mortgage is to improve the value of your home.
These loans borrow against the equity you have in your home, which is partially determined by the overall value of your property, he explains. If you use a home equity loan or HELOC to add value to your home through renovations, additions, or updates, you are getting a lot of your money back in the form of home equity allowing you to borrow more money in the future or sell your home for more cash.
Additionally, you could be eligible for a tax break if you use a home equity loan or HELOC for home improvements.
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