This is a type of loan that speaks its name: it is contracted after another home loan. But of course it comes with its specifics. The reasons for taking a second mortgage depend on the borrower’s intent, from financing home improvements to consolidating debts. Both first and second mortgage will be secured with the same assets.
The second mortgage will have a higher interest rate than the first and the amount that you are allowed to borrow on the second loan depends on equity: the difference between the current value of the property and the amount you owe on it. If the home equity allows it, you may have the option of refinancing and borrowing in excess of your existing loan balance.
What’s the life extent of a second mortgage?
Terms for a second home loan vary between 1 and 20 years. The amount due each month depends on the length of the loan: the longer the life of the loan, the lower your monthly rate. The homeowners should not rush into taking a second loan without knowing all the details. Talk to the lender to get information on the terms of repayment. Shop around and look into various types of loan so as to identify the one that best suits your needs. Contracting a loan with a short repayment schedule could put a lot of strain on your budget. You need to know for sure that you can afford it.
How much will the second mortgage cost you?
The lending fee is the first expense on a new mortgage, and all lenders charge it. Another common name for this fee is “points” and it translates into a percentage of your loan. 1 point equals 1% of what is borrowed. For a $20,000 loan with 8 points you will be charged a $1,600 fee. Compare the offers of several lenders because there are fee variations, and you could save a lot of money. Ask for a quote in writing; don’t rely on word of mouth alone.
In some states, there is a limit to the second loan fee. Information on your state limits can be obtained from the state banking commissioner or consumer protection office. Once you have this info, you can compare the written quote and the state limits to choose the most convenient offer.
FRM and ARM second mortgage rates
Fixed rate loans (FRM) have a rate that does not change throughout the entire term of the mortgage. The other option is adjustable rate loans (ARM) with a variable interest rate. Before you choose an ARM, there are important aspects to check and understand:
– When is the rate changed?
– How often can it be changed?
– Are there limits as to what amounts the interest rate can change?
– What is the basis for calculating the new interest rate?
Second Mortgages Types
The home equity lines of credit and the fixed rate mortgages represent the main types of second mortgages.
The Home Equity Line of Credit is a variable rate loan. At the beginning of the mortgage, the borrower pays a fixed interest rate for a pre-determined period of time, and then the interest rate becomes variable for the rest of the loan term. The lender operates adjustments of the interest rate on the basis of a pre-selected index, and following a pre-established schedule. Most loans have a yearly adjustment. The rate and your monthly payment will thus fluctuate depending on the changes in the index.
The working mechanism in the line of credit resembles that of a credit card: there is a maximum limit. And this limit exists throughout the full term of the loan: any amount you take out cannot exceed that limit. The borrower has the option of paying in advance and keeping the line of credit open for possible future needs.
You should also know that the line of credit is not permanent: it has a fixed term. The agreement you signed with the lender stipulates a time period over which you make withdrawals and pay off the debt. If you reach the end of this term before paying off everything, you either make a larger payment or you refinance it.
The fixed rate mortgage or FRM can be an option for a second mortgage: it comes with a fixed rate and a fixed loan period. There is no modification in the interest rate like in the adjustable rate mortgage. The typical length of an FRM is of 15 or 30 years.
Other important details on Second Mortgages
Do your homework well before contracting a second mortgage! You need to know where you stand with your debt before ‘piling’ up some more on top of it.
The lender of the first home loan has precedence over the second mortgage lender. In case of default or foreclosure, the first lender is paid first and the amount that remains will serve to pay the other subsequent lenders.
There is a qualification process that you must go through just like with the first mortgage. You must complete all the personal information and do the financial paperwork that needs to be submitted with the lender.
A new home appraisal is needed that will serve the lender to determine whether you can borrow the money or not.
Know the costs! Lots of fees come with a second mortgage (just as with your first): loan origination fees, appraisal fees and even closing fees.
Every month you will have two payments instead of one. This is something you should be prepared for. The second mortgage adds up a new rate and puts more strain on your budget. Know your finances well so that you don’t reach the bottom!