A Second Mortgage Doesn’t Have to be a Scary Thing
People take out second mortgages for the same reasons they take out their first. home improvement, consolidating debts, or even to cover part of the first mortgage’s down payment (useful for home buyers with low credit scores who have to make ;larger down payments). The main difference is that there’ll be a higher interest rate.
Second mortgage lenders tend to have terms from one to 20 years. Higher monthly payments come with shorter terms. Compare second mortgage lenders, but make sure to lock on to a rate as soon as you’re comfortable with the number. Home mortgage rates fell more than 3% in 2012, but trends are temporary and you never know what comes next. That’s also why it’s good to be generous with your planning — it’s good to pay back loans fast, but select too short a repayment period and you’ll be stuck with monthly payments you may not be able to follow up on.
Second mortgage lenders, like firsts, still charge a fee for loan origination and appraisal costs and for lowering the interest rate. Have your list of mortgage lenders ready and compare their fees before committing to one.
There are variable and fixed and adjustable loan rates which affect your monthly payment as well. If home loans rates are fixed, that means that they stay the same for entire term of the loan. If your contract allows your second mortgage lender to change the interest rate, you must make sure you know when and how often this can be done, and whether there are limits to the changes.
To top that off, second mortgages are further split into two categories. They can also be fixed, or they can be home equity lines of credit. The last option is a type of adjustable mortgage. The rate is fixed for a little while then eventually becomes adjustable based on the changes in per-defined indexes and schedules once a year. Think of it like a credit card. During the loan period, you can take out money up to the limit of the credit. The difference is that there is a time limit for how long the line of credit stays open, and therefor on how long you have to pay it off.
FACT: The lender of the original home mortgage has precedence over the lender of the second mortgage.
Overall, a second mortgage is exactly the same as a first mortgage, if a little more difficult to get. The second mortgage lender knows that if the home is foreclosed on, the first lender will be paid first, and whatever is left over will go to the second mortgage lender. This is why good credit and paying off credit cards is critical for approval — not only is your credit score important, it proves tot he lender that you have been responsible with your payments in the past. If you have bad credit, you still have options, but it’s much easier if you clean up your credit history before applying for all types of mortgages.