Second Mortgages
Consumers needing to free up cash so that they may attend to their financial affairs will find an easy, accessible and first-rate solution in what is known as second mortgages. In order to apply for one of these home mortgages and receive the needed funds, homeowners must pledge their homes as collateral for the money being borrowed. It is commonplace to find properties with multiple liens or mortgage loans. Second mortgage loans are based on the amount of ownership, interest or equity that borrowers have in their home. Equity on a second mortgage is defined as the difference between the property's present appraised value and the sum that the borrower paid towards the first mortgage.
The second loan that is recorded at the city or county's registry is called the second mortgage, and it constitutes a second lien on the real estate in question. A 2nd mortgage is subordinate to the first loan and is secured against the identical assets as the first mortgage. Because a first mortgage has priority, when a borrower defaults on his loan, he must first pay off the first loan before clearing the balance on the second loan.
Applicants can choose from among three second mortgage variations:
- A home equity loan
- A home equity line of credit (HELOC)
- A traditional second mortgage
Prospective borrowers can take out a 2nd mortgage for one of a myriad of purposes, including the following:
- Home renovation
- Higher education tuition and fees
- Debt consolidation
- Purchase of a second home
- Avoidance of Private Mortgage Insurance (PMI)
- Purchase of a new car
- A vacation
- Emergency expenses
Borrowers may obtain more funding through a second mortgage than via traditional home mortgages. A 2nd mortgage is usually offered for a shorter length of time than a first loan. The typical term of a second mortgage ranges from 5 to 10 years; however, the repayment date for some of these mortgage loans may be as short as one year or extend up to thirty years. To obtain a second mortgage, consumers must pay a fee, typically a loan percentage oftentimes referred to as "points". A number of states place a ceiling on the fee amount that a mortgage company can charge on these types of home mortgages.
Since 2nd mortgage loans expose creditors to greater risk, they usually carry higher mortgage rates than other home mortgages. For loan rates that are fixed, interest rates are set in advance and remain the same throughout the loan term. This means that monthly payments do not fluctuate, and that borrowers are protected against rising loan rates. With other second mortgage loans known as adjustable rate mortgages or ARMS that feature variable mortgage rates, interest rates are adjusted periodically. Therefore, when interest rates increase, the monthly payments follow suit. Today's second mortgage rates are affordable due to the fact that it is a competitive market. Creditors base their loan rates on a borrower's credit rating, existing market trends and total loan to value ratio. By shopping around, consumers will find loan rates that are much lower than the prime lending rate.
Because the underwriting guidelines are more liberal for second mortgage loans, the process of obtaining a 2nd mortgage is much easier and more expeditious than that of refinancing a loan. Furthermore, even though borrowers pay higher interest rates on a second mortgage than on loan refinancing, they recoup the savings by way of lower transaction costs associated with the former. Therefore, in the long run, a second mortgage may be cheaper than refinancing. Finally, borrowers will be able to claim a tax deduction for interest paid on their 2nd mortgage.
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