If you are reading this article, you may be thinking about getting a second mortgage and whether this is the right solution for you.
Getting a second mortgage can be a great way to pay for emergency expenses or to borrow money at a low interest rate. But many people are put off by the name second mortgage – they may think of how much they owe on their first mortgage and think “why would I want two of those?!”
But a second mortgage is simply a name for a loan that is secured by your home equity. Yes, it can be a substantial loan, but it is often a much better choice than unsecured loans which generally come with much higher interest rates.
A second mortgage does not require you to break your current mortgage like refinancing does. So if you carry a second mortgage, it is important to remember that you will have two separate payments. Most lenders will allow you to borrow up to 80-85% of your home equity depending on your circumstances.
Why get a second mortgage?
When it comes to borrowing money, you’ve got a number of options. But as a homeowner who has built up equity in your home, there are some real advantages to using this resource.
If you are looking to borrow a large sum of money, getting a second mortgage can be a great choice. If you have been building up equity in your home for some time, the amount you will be able to borrow can be substantial. As you pay down your home’s mortgage – and as home values rise – the amount of equity in your home goes up. This gives you considerable borrowing power.
For example, say you have a home that is worth $500,000 and you still owe $300,000 on your first mortgage. This means you have $200,000 in home equity. If you choose a lender that lets you borrow up to 80%, then in this scenario, you would be able to borrow up to $160,000. (That’s not to say you can’t borrow less of course – but it’s nice to know you have the option to borrow such a high amount).
Unlike refinancing your mortgage which requires you to break your first mortgage, there is no financial penalty to pay when you get a second mortgage.
While the interest rate on a second mortgage is usually a little higher than the interest rate on a first mortgage, it is still considerably lower than the interest on other types of unsecured loans. This makes a second mortgage a good choice for those that have sufficient equity in their home and who are looking to save money on interest.
Homeowners use the cash for their second mortgages for a number of purposes. Consolidating high interest debt is one reason to get a second mortgage but other reasons include financing home improvements, starting a new business etc.
The main thing you should consider in getting a second mortgage however, is your ability to pay it back.
How does a second mortgage compare with other mortgage solutions?
When homeowners are looking to borrow from their home equity, the main options that they have are to get a second mortgage, to refinance their mortgage. (There are also home equity line of credits for those that need revolving credit, but that’s a topic for another time).
The advantage of getting a second mortgage is that you do not have to break your first mortgage in order to get it. As mentioned however, the interest rate on a second mortgage may be a little higher than on the other options.
While a mortgage refinance usually has a lower interest rate however, it does require you to break your current mortgage so there will be a financial penalty for doing so. Working with a mortgage broker will help you determine whether getting a mortgage refinance or a second mortgage will be the more feasible option for you.
Paying off a second mortgage
Paying off a second mortgage is simple – you make your regular monthly or bi-weekly payments to the lender just like you do with your first mortgage.
That being said however, the contract terms work a little differently. While the most common term for a first mortgage is a five year term, the most common term with a second mortgage is a one year term. When the term of your second mortgage is up, you will have the option to renew (just like you do with your first mortgage), or to pay off the balance in full.