Many homeowners opt for a second mortgage which is an additional loan against your home. If planned well a second mortgage can be your savior in bad times or a trap of financial edge. There are many things to keep in mind while applying for a second mortgage. We will provide you with a complete guide about the second mortgage, how it works? Advantages, disadvantages and everything you would want to know.
What Is a Second Mortgage?
A second mortgage means taking a loan against the equity of your home, which means the equity acts as a collateral. This loan is also known as a ‘second mortgage’ as you already have a prevailing loan on your property. The amount that a lender offers for a second mortgage depends on the built equity of your home. The repayment of a second mortgage will only proceed only when you pay off the primary mortgage. Usually, the interest rates for the second mortgage are higher and the amount borrowed is lower than of the primary mortgage.
How Does A Second Mortgage Work?
A second mortgage is provided by lenders through employing your equity as security. In such an instance if you have a mortgage on your property or not, you can still secure a second loan by redeeming your equity that was heaping over the years.
The amount given for the second mortgage is calculated by estimating the current market value of your home and subtracting the installments paid for the first loan. For example: If your home costs 300,000 dollars and the remaining debt from the first mortgage is 210,000 dollars then you have collected 900,000 dollars of equity. Here, the lenders may lend you around 60% to 80% with respect to your equity.
Types of Second Mortgages
There are three types of mortgages that fall under the broad term of the second mortgage. The names of the mortgages are –
Standard Home Equity Loans
Home equity loan is the traditional category of loan where the fixed amount is given to you for a fixed term. The amount remunerated is spread over the span of 5 – 15 years. Once the loan closes you receive all your money in a lump sum amount.
Home Equity Line Of Credit (HELOC)
A Home Equity Line Of Credit gives you the liberty to draw money whenever you need it until the maximum amount of credit line. HELOCs also have a draw period which is usually 10 years. During this period you can utilize the line of credit while you only pay the interest on your principal. Post the draw period your payments (including interest and principal) are remunerated over the remaining loan tenure.
What is a piggyback loan? A piggyback loan is a category of second mortgage that acts an additional loan to your primary mortgage. Instead of trading your home equity for borrowing money, a piggyback loan becomes your supplementary loan. Many homeowners choose piggyback loans to elude the hassles of PMIs.
A piggyback loan means using two loans to finance the purchasing of a single property with less than 20% equity. The loan has a ratio of 80/10/10 meaning: you’ll be lent with 80% of the amount from the lender, 10% will be provided by the piggyback mortgage and the remaining 10% will be the down payment that you will provide.
Tips to Opting For a Second Mortgage
It is advisable to always make a full-fledged plan before you proceed to apply for the second mortgage. We would like to share some tips on how you can get yourself prepared before applying for a second mortgage.
Craft a Financial Strategy
Ask questions to yourself like how will you utilize the money from second mortgage? What will your repayment structure look like? Will you have enough money as a backup for emergencies? Asking such questions will help you plan a better framework to repaying and employ your second mortgage.
Understand your credit score
Extracting your credit score will give a better understanding and provide you with options to choose a suitable loan. Your credit scores affect the amount you will be lent with hence, it is also important to keep it on the positive side.
There is a complete list of documents that you need to provide while applying for the second mortgage. Although you might be asked for additional documents depending on what kind of loan you apply for, there are some necessary ones listed below –
- W2 earnings statements or 1099 income statements for the last two years
- Federal tax returns for the last two years
- Bank statements for the last few months
- Recent paycheck stubs
- Proof of other income, such as tips, Social Security payments, investment income, etc.
Ways to Use a Second Mortgage
As second mortgage equally stands to be a big amount to spend. You’ll have to put your funds at appropriate places where you can increase your property’s worth. There some common ways to do so like –
These stand to be the most common choices amongst the homeowners as they directly improvise the sale of your home. When your home looks good, it bids for a higher price which means profits and easy repayments.
A second mortgage has lower rates but, it might significantly change your situation from losing a home to a better repayment structure.
Education and Healthcare
The second mortgage can provide you with a substantial amount for funding your child’s educational needs like college or tuition fees.
Emergencies are very unfortunate, you never know what surprise life might have for you. It is important to have a healthcare plan with lower interests on your side.
Advantages and Disadvantages of a Second Mortgage
Each thing has its pros and cons similarly, it is the case with second mortgages as well. We will state some advantages and disadvantages of having a second mortgage.
Advantages of second mortgage
- Large loan amounts become accessible
- You get lower interest rates
- Tax benefits
Disadvantages of second mortgage
- Reduces your home equity
- Limits the ability to borrow
- Additional closing costs and monthly payment
- Higher interest rates
By now you might have understood about the complete process, pros, cons and a lot about the second mortgage. Although, second mortgages are extremely convenient it is also important to determine if they fit your needs.
If you need any assistance with respect to real estate, you want to sell your house fast or have any other requests you can contact us on ‘Elite Properties’ and we’ll provide complete assistance to your queries.