Authored by Jayant Row in Loans, Mortgages
Published on 04-15-2009
A second mortgage loan is a loan on the paid up value of the property that is under first mortgage. This means that if you have earlier taken out a mortgage of 100,000 dollars on your property and have so far managed to pay back 40,000 dollars, you would be eligible to take out a loan on the 40,000 dollars part of your property which you already own, and for which you have paid. What you do when you take out a second mortgage is that you use your property as collateral for taking an additional loan. These second mortgages are generally taken out to finance home improvements, to acquire other assets or even to fund the college education of your children.
A second mortgage does not have priority and the payments would always have to be made to the first or primary mortgage before you can allot funds to the second mortgage. The advantage of a second mortgage is that it is tax deductible and could reduce your tax burden. The disadvantage of a second mortgage is that you are taking a chance with your property and should there be any problems in the repayments of the second mortgage you could lose the equity that you had created while making payments on your first mortgage.
Interest rates on second mortgages are always higher, because the lender knows that in case there is a default, the first mortgage primary lender would get paid first and the second mortgage lender would have to wait till the first mortgage dues are cleared before he can expect a bite of the apple. When shopping for second mortgages take quotations from a number of companies before settling on one. Be careful if balloon payments are on the schedule, as these would have low initial payments that can in the future increase to unmanageable proportions. Also ensure that you are aware of all the other appraisal fees, application costs and closing costs, so that you are aware of the full extent of your commitments before you opt for the second mortgage. Also ensure that there is no problem in your continuing with the first mortgage. If you do not like surprises, opt for a second mortgage loan with fixed interest charges, so that you are aware of your long term payment schedules much in advance and can plan your finances accordingly.
Before going in for second mortgage loans ensure that you have a clean credit history as otherwise you could be liable to pay higher interest charges. There will be no problems if your payments to the first mortgage have been regular and you have no black marks on your history with respect to credit card or other payments.
Make sure that the amount you consider as equity on your property, the percentage of your property that you have already paid for in the primary mortgage, tallies with the records of the company who has given you the first mortgage loan. There is sometimes a discrepancy due to amounts not having been credited and you would need to clarify all this and obtain necessary documentation from your bank to back up these claims.
See if you can get an appraisal of the present value of your home in case you feel there is a wide discrepancy between your mortgage value and the present value. This will help you to get a better second mortgage if the equity turns out to be higher. As a rough estimate you should know that the total value of the balance on your first mortgage and the amount you are considering for a second mortgage should never be higher than 80 percent of the value of the property being mortgaged.
Instead of a second mortgage you can also opt for a home equity line of credit (HELOC). This would allow you to borrow smaller sums of money whenever you need them and repay them on a variable interest rate regime. This can also be useful if you are considering a debt consolidation scheme to adjust your finances.