Simply put, a second mortgage is a second loan that you make, using your home as security. This loan can be paid out in cash or in monthly installments.
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What is a second mortgage?
Simply put, a second mortgage is a second loan that you make, using your home as security. Your first mortgage agreement states that should you not make the payments, you’ll lose ownership of your house. The second mortgage follows in that pattern. Your second mortgage is a second loan that you apply for using your property as security, should you not pay that loan back.
Your second mortgage can be used for many things. Perhaps you just need cash for various purchases and requirements. You can also use a second mortgage to take a loan and pay off all your debts. This is called debt consolidation. You might also feel the urge to redecorate or to build a new room for that new family member. Whatever your individual circumstances, a second mortgage provides the needed cash for that unforeseen occurrence.
What are the requirements for a second mortgage?
Some companies require that you have a certain percentage home equity. Your home equity is essentially the percentage of the home that you have paid off. Thus if you bought a home for $100 000 and you’ve paid off $50 000, your home equity is 50%. When taking out a second mortgage, certain secondary lenders will require that you have a certain home equity. This is basically to cover themselves in the event of you not making the payments and them having to reclaim your loan.
With the amount of new companies offering second mortgage services, competition between such companies has become tight. Thus nowadays, there are growing amounts of companies that are taking the risk and offering second mortgage loans and not requiring any home equity. With a bit of research you’ll be able to find a second mortgage company that offers the best package for your circumstances.
What should I be aware of regarding a second mortgage
When it comes to pay-outs in the event of foreclosure (if you can’t keep up with your payments), your first mortgage takes priority over the second mortgage. Thus in the event of foreclosure the second mortgage company will have to wait in line to get paid. The first mortgage company will get paid first, then the second and so on.
Thus, your second mortgage company is at greater risk of not being paid in the event of foreclosure. Your second mortgage is likely to be at a high interest rate and will end up costing you more in the long run.
Have a look at our research on mortgage interest rates to ensure you get the best deal for your mortgages.