Sometimes you may need a lot of cash, but can't find any other way to get it, except by pulling equity out of your home. Here's where a second mortgage can help you. This article gives you an overview of second mortgages and covers the following aspects:
What is second mortgage?
It is a loan taken out against your home after you have already taken out a first or primary loan. The equity you have in your home is used as collateral for the second loan.
A second mortgage has second priority after the first mortgage. So, if you default on both loans, you need to repay your first loan prior to paying off the outstanding balance on the second.
When should you choose a second mortgage?
There are situations when you may want cash out some of your home equity by taking out a second mortgage. They are
- You have accumulated a large amount of debt and need to pay them off.
- You want to make an investment or start a business and need capital. Make sure your return on the investment is higher than the interest rate on the second mortgage or you may end up deep in debt.
- You want to avoid paying private mortgage insurance. This is possible only when you get a second mortgage that makes up 20% of the home purchase price.
- You want to purchase an expensive item like a new car, new appliances, or another property.
- You want to remodel or add to your home.
How much can you borrow?
A second home loan allows you to borrow based on your home's equity. The amount of equity you have in your home is the amount of the loan(s) you have paid off, i.e., the amount of the home you own outright.
With most lenders, you can take a second loan so that the total loan-to-value ratio of your first and second loan is equal to 85% of the home's appraised value. However, there are lenders in almost all states, except Texas and West Virginia, that allow you to take out second mortgages equal to 125% of the appraised value.
What are the possible rates, terms and options?
Interest on a second loan will be higher than with a first loan. This is primarily because if you default, you will be paying off the first loan before the second, and as such there is a higher risk involved in offering second mortgages. Fixed rate home equity loan and adjustable rate home equity lines of credit are available. The lender will quote you a rate depending upon your credit score, total loan to value ratio, and current market trends. The loan term will vary from 15 to 30 years depending on the option you choose. But in general, a second loan is offered for a shorter time period than a first loan.
How do you get a second mortgage loan?
You use the same process you used to find your first mortgage to find a second mortgage. You need to shop around for a suitable loan by approaching different lenders and getting quotes. You can simply fill out a free short no-obligation free short form to get quotes from community ranked lenders on this site. Then you should compare the quotes, find the offer that will work best for you, and fill out the necessary paperwork to apply for the loan. The lender will conduct an appraisal of your home in order to determine its current value, complete all the steps necessary to process the loan, and arrange for the loan closing. At closing, you will sign the note and security instrument required by your lender. You will have to pay closing costs similar to what you paid when you got your first loan.
What happens to the second loan if you refinance the first?
When you refinance the first loan after getting the second mortgage loan, you should ask your lender to ensure your second loan is subordinate to the refinance loan. Most refinance lenders are willing to do this in order to reduce their risks, but it also saves you money.This means your second home loan will retain its junior priority status to the refinanced first loan. Otherwise the second mortgage will become the first loan and the refinance loan will take over the secondary position.
With a second home loan, you get the chance to tap a large sum of money in exchange for some of your home equity. Moreover, you may be able to deduct some of the interest from your income taxes. However, there are a lot of additional costs involved with taking out a second loan.
In addition, if you default on the second loan, you may lose your home in a foreclosure. Therefore, prior to going for a second mortgage, it is best to prepare a budget and find out how much you can afford to pay in addition to the first loan and your other obligations.
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Caron
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Joined: 19 Jul 2005
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Location: florida
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Post subject: costs of 2nd mortgages |
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A 2nd mortgage requires similar costs that are payable in a first mortgage. The closing costs range from 3% to 6% of the loan amount. Lenders charge an administrative fee of about $250 along with an appraisal fee that lies between $300 and $400 for a standard owner occupied single family residence. They also demand fee for obtaining and checking the credit reports. This credit fee ranges from $25 to $65. There are also the title and escrow fees that may be slightly less than that of the first mortgage.
Most lenders allow for a "Flag" title insurance policy in a second mortgage having loan amount of $200,000. This policy requires the payment of a flat fee of about $125. Often a "Sub-escrow" or "Mini-escrow" fee is also charged. This fee amounts to something between $225 to $250. Apart from all these costs, the lender also charges standard notary fee, recording fee and pay off fees lying between $60 and $150. |
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Dauglas
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Post subject: Deducting second mortgage interest |
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I am currently seeking for a second mortgage on my home. I will use the money for home improvements and to clear some debts. I have very little equity built up as I have recently bought the house. Can I write off the interest on the second mortgage? The loan is a 125% loan.
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Jessica
Community Mentor
Joined: 08 Jun 2004
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Location: OHIO
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Post subject: interest deduction on 2nd mortgages |
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Hi Dauglas,
Welcome to MortgageFit Forums.
Generally, you can claim a tax deduction on the interest that you are paying on your home mortgage. But you will have to acquire the property first and then borrow at least $100,000. You should also claim the interest on this loan as a qualified residence interest.
However for the interest to remain deductible there are certain limitations, for example, the secured loan balance cannot exceed the fair market value of the home. But a 125% loan is meant to exceed the fair market value of the home. And, lenders generally make such offers if you are willing to pay off the loan at higher interest rate and also if you have a good credit history.
You will be allowed for tax deduction on the interest on your 2nd mortgage but only if the sum of the first and second mortgages do not exceed your home value. Your home value is likely to increase if you go for home improvement. And, this will help to increase your liability to pay off the loan.
Regards,
Jessica |
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tanesha
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Post subject: home loan to purchase another with bad credit |
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| I am single mother looking for a bigger home in a better neighbor hood. I have be in my current home for six years. I do own it. I however have bad credit and I belive the chances of my purchasing another home is next to impossible if someone has any information I would like their input Thanks |
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jerry
Moderator
Joined: 17 Oct 2005
Posts: 2615
Location: MICHIGAN
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Post subject: RE: |
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Hi,
Welcome to the forums.
Nowadays lenders are willing to give loan to the borrowers who have low credit score. But the interest rate that you will be charged on the loan is surely going to very high.
MortgageFit has a large network of mortgage lenders. What you all need to do is sign up with them, so that their loan department can find the best lender suiting your needs.
But if you take my advice I would ideally want you to wait for some more time and work on improving you credit score by working out on some of the basics, like planning your monthly budget and meeting your bills on proper time.
Please feel free to ask if you have any more doubts. 
Thanks,
Jerry |
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Caron
Moderator
Joined: 19 Jul 2005
Posts: 1519
Location: florida
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Post subject: |
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Hi Tanesha,
I agree with Jerry; it is always better to improve your credit profile before you think of taking a loan. Please go through our section on credit repair for some tips on how you can improve your credit score.
Thanks,
Caron. |
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Meredith
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Post subject: second mortgage |
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| I owe 105,000 on our house bought two yrs. ago. I took a home equity line of credit to get the other 10% for down payment. The house was initially assessed for 157,000. We have done alot of improvements. Can I take a second loan to get rid of the high interest debt I have. |
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blue
Joined: 21 Oct 2005
Posts: 1131
Location: MARYLAND
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Post subject: |
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Hi Meredith,
You can take a 2nd mortgage provided you have built enough equity on the home.
BTW, what rates do you have on the debts?
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jameshogg
Joined: 20 Dec 2005
Posts: 10144
Location: Nevada
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Post subject: |
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Hi Meredith,
I understand your concern. There are no limits in the number of mortgages that you can take provided you qualify and you must also check that your purpose is served.
You can opt for refinancing of the 2nd mortgage also. If you get lower rate in refinancing your HELOC to a fixed rate second mortgage then you can go for it. But check whether the difference will benefit you when you need to pay the pre-payment penalty, if there is any.
James |
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jojo
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Post subject: second mortgage |
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| we bought a house a year ago and we still owe about $280,000 and the value of the house is about $370,000 we want to consolidate all of our debt which will be around 80,000 can we still take a second mortgage of 80,000 and do you know how much monthly payment will i pay for the second mortgage |
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adonis
Joined: 22 Oct 2005
Posts: 10242
Location: ALASKA
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Post subject: RE |
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Hi, Jojo
Thats all depend on the amount of the loan and terms agreed. Basically it will be calculated on the interest as well.
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Woody
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Post subject: 2nd Mortgage |
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| I bought my home about six month ago. I do not really have any equity built up yet. can I do a 2nd mortgage? |
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Samantha
Community Mentor
Joined: 16 Sep 2005
Posts: 1609
Location: MASSACHUSETTS
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Post subject: 2nd Mortgage |
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Hi Woody,
Welcome to MortgageFit Forums.
You can get a home equity loan without any equity on your home with some lenders. For that you will have to pay significantly higher interest rates and closing costs. PMI will be required.
Home equity loans are cheap if you have already enough equity on your house. If you try to borrow before you have built some equity you will get it with a little shopping around but you need to pay higher costs and will get fewer perks.
God bless you.
For MortgageFit,
Samantha
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Remo
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Post subject: Should I go for second mortgage refinance? |
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| I have a mortgage and a second loan on the same property which is my primary residence. I have used the second mortgage to purchase a second home which I thought will be able to sell within a few months of time. But time is over and it has been over 6 months since I tried to sell the home. So, what I can think of is, either I go for the second mortgage refinance or rent the second home or short sale will be ok? Either of these would be better than foreclosure, isn't it? Pls help me decide which will be the right way. |
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