All About Second Mortgages
Let’s start by defining our terms. There’s nothing mysterious about a second—it’s merely an additional ‘layer’ of mortgage on your property. Seconds are known as subordinate mortgages, because should a borrower default, they are second in line to collect on the loan.
Because of their subordinate status, second mortgages are generally more expensive than firsts—that is, they carry higher interest rates on a smaller amount of money. A general rule is, the more equity you have in your home, the less red tape qualifying will require.
In recent years, second mortgage loans have become more difficult to obtain, since the recession has caused more borrowers to default. Because hey are secured against a high-value equity item, lenders still consider them safer than loans without collateral.
What would cause a homeowner to risk the loss of their home? Second mortgages are incurred for many reasons:
• New car
• College tuition
• Upgrade a home
• Pay off higher interest debts, such as credit cards
Often, a sudden need for a great deal of money spurs borrowers to obtain second mortgages, such as an emergency home or car repair. It is clear that discipline must play a primary role in availing oneself of this much capital.
What are the disadvantages of incurring a second tier loan against your house?
• Second mortgages wipe out some or all of your equity
• In a sense, you have to ‘rebuy’ your home
• Catastrophic results can occur should you default
• Higher interest rates, extra services and fees
• More expensive overall if first mortgage lender decides to extend your PMI insurance
How to Find a Lower Rate Second Mortgage
The easiest way to lower your rates is usually to approach a financial institution with which you have already established a reputation. Through these established relationships, you have already demonstrated an ability to save wisely and pay back borrowed funds. These institutions include:
• The holder of your first mortgage—if your payments have been made on time
• A bank with which you’ve maintained a loyal history
• Referral from a friend who may have refinanced
• Online lender—always get written offers from three and compare rates and terms. Be sure to verify the validity and solvency of any online lender, and check around regarding their reputation
Strategies for Obtaining a Trouble Free Second
Be sure that you have a subordination clause in your mortgage agreement. This spells out, in legal language, that 1) the second mortgage perpetually stays second in line for repayment; and 2) that you are free to refinance your first mortgage at any time you wish, without consulting your lenders.
Give serious thought to borrowing more than what you home is worth at its current market value. This is a fast way to lose your home if you are unable to pay.
Keep your credit report clean as a whistle, as a superior credit score will lower your second mortgage rates. Play one lender off against another to get the best rates. Review the fine print meticulously, with an attorney if necessary.
Be sure to use a second mortgage calculator to factor in points, closing costs, interest plus your first mortgage payment.
Second Mortgage Alternatives
A HELOC is a line of credit backed by the equity in your home that carries an adjustable rate. A big advantage of this instrument is its tax deductibility. Another is the long payback period (up to 20 years).
Lenders determine your credit limit, and then you can use the HELOC like a bank account, drawing out cash as you need it. You will then be billed a monthly amount (plus interest) based on what you spent.
Similar to a HELOC but carrying a fixed rate is the HEL. It allows you to extract a maximum of 85% of the equity in your property. At a fixed repayment rate, you’ll know what to expect every month.
In addition to the Administration’s new foreclosure prevention program and $75 billion Making Home Affordable plan, our president is offering loan modification programs to eliminate the need for seconds. These plans are a win-win for borrowers, as they reward lending institutions for extending payment deadlines, dropping interest rates and making deep cuts in overall loan balances.