Second
Mortgage Explained;
A second mortgage is a loan which is taken out after the first one but still using the same assets as collateral. The amount you can borrow is the difference between the current value of the property and the outstanding amount you still owe from the first mortgage.
For example, if your first mortgage was for $100 000 and your property is now valued at $150,000, you will be able to borrow up to $50,000 as a second mortgage. One of the benefits of owning a home is that you can release any equity which you have built up in the home by taking out a second mortgage.
In the past, lenders were very wary about giving second mortgages but nowadays there is a huge selection of second mortgages on offer with very affordable interest rates. Second mortgages are popular for a variety of reasons – home improvements, college tuition fees, debt consolidation and other emergency expenses.
There are essentially two types of second mortgage;
Home Equity Loan – this is the traditional form of a second mortgage where you receive a one time payment of the agreed amount and you will have to make regular monthly payments at a fixed interest rate.
Line of Credit – this is an amount of money which you can borrow at a future date. You can borrow the agreed amount all at once or in several instalments spread over time. You will only pay interest on the amount you actually borrow. The interest rate is typically tied to the prime rate + a few percentage points. The interest rates will be change periodically and so your monthly payments will be adjusted accordingly.
There are certain points to keep in mind when considering a second mortgage :-
As the lender’s risk is higher, a second mortgage will come with higher interest rates
The duration of second mortgages are usually shorter, typically 15 years
Some second mortgages require a balloon payment at the end of the term.
A balloon payment is a lump sum payment.
In most circumstances, the interest paid on a second mortgage is tax deductible.
So, second mortgages are a great way to release equity from your home and to take maximum advantage of any increase in your home value. But make sure you do your research and consider all options before signing on the dotted line. And always remember that your home is at risk if you fail to make the monthly payments. |
