Getting a second mortgage is not something that you can simply do on a whim. You have to be sure that you understand what you are getting into and that you’ve at least read about the advantages and disadvantages of second mortgages before plunging in. Asking questions is only wise, after all! Below are the answers to the most frequently asked questions people have on second mortgages.
What is a Second Mortgage?
A second mortgage commonly goes by the term ‘home equity loan’. Essentially, it is another loan that you take on top of a property with an existing mortgage. A second mortgage loan is secured against the property it is associated with.
Is a Second Mortgage the Same as a HELOC?
A home equity line of credit is not the same as a second mortgage. The easiest way to explain their difference is that a second mortgage is given as a lump sum and is paid just like a typical mortgage. On the other hand, a HELOC operates more like a credit card because it is a revolving line of credit that can be used and reused until the set time and value limit is reached. Paying a HELOC is usually interest-only for predetermined time.
What is the Typical Interest Rate for a Second Mortgage?
Second mortgage interest can either be fixed or variable. What doesn’t change is the fact that interest for a second mortgage will always be higher than that of the primary mortgage because it carries more risks for the lender. The good thing is that compared to unsecured loans such as a car lease payment or a credit card, a second mortgage has a relatively low interest rate.
What is the Maximum Second Mortgage Credit Limit?
First off, there is a required amount of equity that you need to have before you can get a second mortgage (and this will vary depending on the terms of each lender). Banks usually require a minimum of 25% equity while trust companies may lend you money on just 10-15% home equity. The money that you can borrow can then be up to 80% of the appraised value of your home after the balance of your first mortgage was subtracted from it.
Is It Possible to Apply for A Second Mortgage if I Have Bad Credit?
While it is possible to obtain a second mortgage even if you have bad credit, the truth is that it will be a very long and probably unfruitful process if you approach the wrong lenders. This is because lenders can be very strict about approving second mortgages as they carry more risks for the lender.
For What Can A Second Mortgage Be Used For?
You can use the funds from a second mortgage to pay for any huge expense that you cannot simply save for given your financial situation. You can use it to pay for a home renovation to add value back to your home too.
What Risks Should I Be Aware of Before Getting A Second Mortgage?
Because a second mortgage is a secured loan against your home, you will risk losing your home if you fail to make payments or if you signed one with unreasonable terms. You have to be sure that you can afford the payments and that you fully understand the payment terms.
So, when is it wise to get a second mortgage? The answer is when you’re ready and fully understand the accompanying responsibilities as well as benefits to your finances. You may contact us if you have more questions on second mortgages not answered here. We’d be happy to talk with you at Homebase Mortgages!