A second mortgage, also known as a second lien, is a legal lien placed against a property that is subordinate to another lien, usually a first mortgage or another loan. In many cases, second mortgages fall behind the original mortgage because of lien holding. This means that second mortgages carry higher interest rates than first mortgages and are riskier for borrowers.
Second mortgages may be used for any purpose, including repairs to your home, improving the value of your home, or financing a college education. While second mortgages often pay a smaller interest rate on home equity loans and credit cards, they carry a risk for the lender, especially if the borrower defaults. The interest rate on second mortgages will be based on the prime lending rate plus an additional one percent.
Because of their inherent risk, second mortgages can often be placed on homes without the approval of the lender, and in some states, second mortgages can be obtained without a cosigner. When using a cosigner, you are guaranteeing the loan to the lender and taking the responsibility for repaying the loan. Your responsibility with respect to your loan is the primary focus of the cosigner’s responsibilities with respect to the loan.
Although second mortgages can be a great way to consolidate debt and improve your credit, second mortgages should only be used as an option for financial emergencies. Because second mortgages carry greater risk for the lender, second mortgage broker and institutions charge a high percentage of interest.
Second mortgages typically have a two-year term, although some loans offer a three-year term. Most second mortgages require that the mortgagor to make regular monthly payments that can become very large and can cause a hardship if the borrower does not have access to the funds to pay them back. In addition, most second mortgages do not require that the mortgagor own the property to qualify for the loan.
When getting a second mortgage it is important to consider all aspects of the mortgage, including fees, charges, and expenses associated with the loan. The total costs of the home equity loan, other loan costs, and other related costs may offset the value of the property, leaving the mortgagor with a debt that is larger than the value of the property. Bad credit history can negatively impact your ability to obtain a second mortgage, but it does not necessarily mean you cannot obtain a mortgage at all.
You should compare interest rates from various mortgage institutions to determine the best interest rate for your loan and for your particular situation. There are multiple ways to get a good rate and, such as obtaining a home equity mortgage calculator or working with a mortgage broker or lending institution. Lending institutions often offer free estimates to prospective customers, while home equity calculators can calculate the cost of your loan based on the value of your home. It is also a good idea to obtain pre-approval for a second loan from a lender since this will protect the lender should you default on your current loan or fail to repay the loan in a timely fashion.
If you have a good credit score and are able to pay the first mortgage before making any payments on your second home equity loan, it will help to provide additional security with your second loan. This will help prevent a default from occurring, keep the interest rate you qualify for lower, and protect your home equity.
One of the most important things to keep in mind when obtaining a second mortgage is the potential for damage to the home if you should ever default on your first home equity loan. You may be tempted to apply for another loan to replace the amount of your existing mortgage.
Before deciding to use this option, make sure that you know the terms of your second loan and the potential impact on your credit rating. In the event that you fail to make your payments, your first mortgage lender can foreclose on the property, which could hurt your credit rating and cause you to lose your home.
Because a second mortgage is usually backed by your home equity, there is always the risk of foreclosure. You should carefully evaluate your options before proceeding with the loan.