A second mortgage is a form of funding taken against an asset, specifically a property that already has a first mortgage. It is the most common type of loan with a competitive interest rate. Unlike other loan types, like student loans, car loans, you can spend the lump sum amount generated by mortgaging the home on anything you consider necessary.
Homes can be the most expensive item one can possess, and with time its value increases. So taking a loan against it is a quick and easy way to access the equity. The loan term and rate of interest depend upon your income, credit card history, and term. So, finding the right lender with terms that meet your needs is important. Here are some of the key pointers you need to consider before applying for a second mortgage loan.
Funds
- The amount of a second mortgage loan primarily gets determined by the home equity you have available. Home equity is the amount that is left after subtracting the amount you owe from the value of property. Most lenders will lend up to a maximum 75% of the value of a property.
- You need to take care of the fact that the total amount after combining the first and the second mortgage should not exceed the maximum limit that the lender will provide.
Cost of Funds
- In the case of the second mortgage loan, the underwriting process can be simple because all the necessary administration work was already done previously while issuing the 1st mortgage loan, this applies if the loan is taken out through the same lender.
- Generally, the interest rate on second mortgages is higher than that of first mortgages because it involves more risk for the lender as the first mortgages always get priority in getting repaid. But the interest rate against second mortgages is lower compared to credit cards. It is considered a secured debt by the lender because they have the property as the collateral.
- In most cases, the interest paid on this type of loan is fully tax-deductible if the loan purpose is business related.
- There are no restrictions or specific laws on how to use your fund generated by a second mortgage. You can use it to pay your credit card debt, in business finance, repay your student loan whatever, it might be. There are coded (consumer use) and non coded (business use) second mortgage funders.
Facts related to the Lenders
- Find a lender that has terms and conditions that suit your needs, do some research and look of lenders with lower fees and interest as this will keep your monthly commitments to a minimum.
- As second mortgage loans are long-term options, try to engage with someone who will provide you with flexible payment options and not apply a penalty if you miss a payment due date.
- Try to explore options where it mentions that the lender will give you a discount or rebate if the loan is repaid early.
- In a second mortgage loan, lenders register a mortgage on your property. Mortgages give the lenders the right by law to seize property if there is an event of default that is not rectified.
- Interest rates on second mortgages are usually fixed for the term of the loan which makes it easier to budget and manage repayments.
Bottom Line
Before making any major financial decision, everyone needs to do proper research and analysis. However, the option of using the equity in your home to access funds quickly may be the solution you are looking for.