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10 Big second mortgage mistakes to stay away from

Posted on: 05th Oct, 2005 04:38 am
Getting and managing a second mortgage may not sound tough if you've already taken out a loan against your home. However, there are loopholes that you should avoid. So, prior to getting a second loan, take a look at the 10 big mistakes that can make things worse for you.

1. Not being aware of Home equity loans and HELOCs

Home equity loans and HELOCs are both second mortgages taken out against your home equity. Home Equity loans can be either fixed or adjustable, while HELOCs are only available as adjustable rate loans. In addition, Home equity loans are one-time loans, while HELOCs are revolving lines of credit.

Moreover, the purposes of these loans are different. For example, a home equity loan is designed to help you consolidate debts or make home improvements, but when it comes to fulfilling your periodic needs, HELOC is better. All you need is a basic understanding of both the loans to make them work for you.

2. Taking out a large credit line

Think twice before you take out a large credit line. How much your line of credit is for will be taken into account when you apply for other loan and can possibly get rejected too.

Most often your credit line payments are determined on the basis of your total credit liability even though you have not taken out any money from your line of credit. A large credit line implies large payments that may affect your ability to repay the second mortgage as well as other loans.

3. Not shopping enough for the best loan

You may decide to take out the loan from the bank where you have a checking account. But if you wish to get the best loan for your needs, look one that can give you some benefits and help you save due to lower interest rates.

Therefore you should shop around and get quotes from other lenders/brokers to see what else you can get before comparing and choosing the best one.

4. Not asking for a Good Faith Estimate

It's your lender's responsibility to provide you with a Good Faith estimate (GFE) after you apply. A GFE provides you with a breakdown of all the fees involved so you can be assured that you will not be paying any hidden fees or costs. So, even if your lender forgets, just remind them that you are yet to receive a GFE.

5. Thinking a second mortgage costs you less

You may have to pay less on a second mortgage than if you are managing a credit card. To find out which is better, you need to consider the interest rates on credit cards and compare it with the rate on a second mortgage after taking into account the tax deduction. For example, if you have taken a HELOC. Its effective rate is:

Effective rate = rate* (1 - tax bracket)

If your tax bracket is 30% and the actual rate on the credit line is 15%, then,
Effective rate is = 15% * (1 - 0.3) = 15% * 0.7 = 10.5%

Now, if your credit card interest rate is higher than 10.5%, then the second mortgage will be cheaper to manage.

6. Going for second mortgage when you plan to refinance

Lenders may not allow a first mortgage refinance when you already have a second loan on the same property. They may look at the combined loan amount even if you refinance only the first loan.

Lenders may either ask you to pay off both the loans completely or pay down the second loan when you refinance. However, they may allow you to keep the second loan if you can get a subordination agreement from the second mortgage lender.

This agreement ensures that the second loan has a lower priority with respect to the new refinance loan. Thus, you need to consult the lender offering the refinance loan as to whether they will allow you to keep the second mortgage. You can also compare the rates on the refinance and the second loan to find out if it makes sense to keep the second mortgage and refinance the first or refinance both into a single loan.

7. Being unaware of second mortgage tax deduction

Your home equity loan/HELOC may not be fully tax-deductible and you can't always trust the lender to give you the correct information. If you want to take advantage of any tax deductions, you should consult a tax advisor or a CPA.

8. Use Heloc to pay off credit card debts

If you have taken out a HELOC to pay off credit card debts, make sure that you don't completely exhaust the available credit limit. You may find it hard to make the payments on time.

9. Being unaware of a prepayment penalty

There may be a prepayment penalty clause in the second mortgage agreement that could cost you a lot of money if you try to sell or refinance your home and pay off your mortgage early.

10. Not knowing about life caps

Usually home equity lines of credit have life caps where the interest rate can go up much higher than you expected. So, plan your budget and keep a cash reserve if you need it.

No matter why you need money, getting a second mortgage can be a good way to get it. But in order to avoid a second mortgage trap, you should know what you're getting into before you take out a home equity loan or a HELOC.

Welcome anonymous,

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Take a look at it. Hope it helps you.
Posted on: 12th May, 2010 11:29 pm
Owned house 420,000 with a mortgage 242,000. Want to buy an investment apartment but not enough for 20% down. Should I take a second mortgage for the whole 20% on my home or just 10% what I need or do not buy? :roll:
Posted on: 13th Jul, 2010 04:50 pm
Hi amjkkl,

If you have equity in your property, then you'll be able to get a 20% loan on your existing property. You may even cash out the amount that you want to use as a down payment. If you have the required equity, then I don't think it would be a problem for you.

Take care.
Posted on: 14th Jul, 2010 01:32 am
Hi, I bought ahouse for $102,000, it appraises for $150,000. I was thinking of taking a 2nd mortgage of of $10,000 to pay off credit card debt. I was thinking it may be easier to pay one thing instead of several cards with high interests rates. Would this be the best way to approach this by taking a 2nd mortgage out?
Posted on: 19th Jul, 2010 10:06 am
hi felicia,

rather than taking out a second mortgage, you can refinance the loan and take a cash out of $10,000 to pay off the credit card debts. thus, you would be liable for a single monthly payment on your mortgage rather than two separate payments that you'll have to pay if you takeout a second mortgage on your property.

thanks
Posted on: 21st Jul, 2010 12:50 am
I have a low rate currently on the equity line, however, these payments
are killing me. I would love to eliminate the 70 but don't know how.If i
sold my home for 200 oweing 45000 to equity, do i have to pay that?
Posted on: 03rd Sep, 2010 10:44 am
Hi roseann!

Welcome to forums!

As you've equity in your property, you can refinance both the loans into one. The cash proceeds that you receive while refinancing the loan, will help you in paying off the HELOC. Thus, you will be liable for paying only one mortgage.

Feel free to ask if you've further queries.

Sussane
Posted on: 03rd Sep, 2010 10:54 pm
My mortgage is paid off and I own an unimproved lot. Is it possible to acquire a 2nd mortgage on the lot rather than on my house? and, if so,
how do the possible interest rates compare?
Posted on: 01st Oct, 2010 11:33 pm
You can take out a loan on your unimproved lot. If the lot has a first mortgage, then you'll have to check out whether or not there is equity in the property. You'll get a second loan on the lot if there is equity in the property. You can speak to the local lenders in your area and check out the type of rates and terms you'll qualify for. This will give you an idea about the market rates.
Posted on: 04th Oct, 2010 01:38 am
I have property in another state. If I want to buy a house in NJ can I combine the mortgage or take another one out in this state
Posted on: 13th Oct, 2012 12:22 pm
Hi Louise,

You cannot combine mortgages which have been taken out on two separate properties. You will have to take out a separate loan on that new property.
Posted on: 15th Oct, 2012 12:26 am
What other banks loan against a lot others than BB&T?
Posted on: 12th Jun, 2013 08:38 pm
Hi Steelers!

Welcome to the forums!

You can look out for lot loans. You can contact other local lenders and apply for a mortgage. If you meet all the required criteria of the lender, then you will be able to get the loan.

Feel free to ask if you've further queries.

Sussane
Posted on: 12th Jun, 2013 10:06 pm
My husband and I have excellent credit scores, but when I ask about needing a 2nd that would go to a 95% LTV, we can't seem to find any lenders. Any suggestions who might do them in Colorado?
Posted on: 16th Jan, 2014 05:57 pm
My husband and I have excellent credit scores, but when I ask about needing a 2nd that would go to a 95% LTV, we can't seem to find any lenders. Any suggestions who might do them in Colorado?
Posted on: 16th Jan, 2014 05:59 pm
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