A Second Mortgage: 5 Facts You Should Know

A second mortgage is, traditionally, a mortgage that you borrow in addition to your first, primary mortgage. While the primary mortgage is used to purchase a house or property, the second mortgage is used for a variety of other purposes, including paying off debt or renovating the house. While second mortgages are small, the cash they provide can be tempting for many homeowners. If you are considering a second mortgage, here are several facts you should consider before making a decision:

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1. Second Mortgages Depend on Equity:

Equity refers to how much your home is worth after deducting all the debt you still owe on it. Second mortgages are provided based on this equity. Typically, second mortgages are only for 10 to 20 percent of the home’s total value. If your primary mortgage was recent, you may need to wait several years while paying down the mortgage, or wait for property values in your areas to rise. Both with increase your equity – and the amount you can borrow.

2. Second Mortgages Can Act as Lines of Credit:

Second mortgages are inherently more flexible than primary mortgages. For example, a very common option is the HELOC, or home equity line of credit. This loan takes your home equity and uses it to offer a running credit account. You can regularly borrow money using the account, up to a certain amount each month or year. These lines of credit last several years but must typically be paid off either year by year or after the line of credit is closed. This may be especially useful for financing a business or working on a long-term construction project.

3. Lenders Look for a Reasonable, Value-Adding Purpose:

Speaking of business ventures and construction, lenders look for real value when they create second mortgages. Banks like to see some sort of activity that will add value to the house or at least make it easier for the borrower to make payments. Plan on using your second mortgage for renovation, construction, a college education, or a wise investment for the best results. Lenders are less willing to consider lending to someone who is only interested in paying off other loans or continuing a debt cycle.

4. Rates are More Important Than Ever:

Second mortgages tend to have worse interest rates than primary mortgages, due to the presence of already-existing debt and increased risk. This makes rate research more important than. Carefully analyze current second mortgage rates – expect them to be higher than first mortgage rates, but search for the lowest rate nonetheless. Avoid variable rates and balloon payments whenever possible, since these tend to trade long-term benefits for short-term advantages that quickly fade.

5. Default Can Still Cost:

Keep in mind that many of the payment and legal rules still apply to a second mortgage. Do not make the common mistake of thinking that a second mortgage is somehow less important than a primary mortgage. You cannot make primary payments but skip secondary payments without problems. If you go into default on a secondary loan, that lender can typically foreclosure on your house to collect payments even if your primary mortgage is current and spotless (primary lenders will still receive their share). You are accepting another key debt responsibility with this new loan.

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Garima is the founder of LoveTheTips.com, a UK based blog offering most useful tips on the topics you love to know more about. She enjoys travelling, blogging and spending time with her 6 year old daughter.

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