Brief Guidelines On 2nd Mortgages

2007-03-08 10:33:40

( Financial )



Second mortgages are secured loans taken out against the value of one’s property for a second time. Second mortgages are classified as subordinate mortgages, which require that if the borrower defaults in their payment, the first mortgage has to be settled first: any money that is left after paying the first mortgage would then be used to pay for the second mortgage.

Individuals apply for 2nd mortgages to pay for their credit card debts, purchase a car, make property renovations, pay for one’s education and in some cases, to add to the down payment on their first mortgage loan.

There are many different types of 2nd mortgages:

A second mortgage line of credit works like a credit card: the only difference is that with a second mortgage line of credit, you have your property secured as collateral, whereas credit cards are unsecured loans and therefore require no collateral. With a second mortgage line of credit, one is given a credit limit for which unlimited withdrawals can be made. The interest rate to be charged will depend on the current prime interest rate, which is reviewed periodically. Once these rates increase; so will your monthly payments.

A 125 percent loan-to-value loan can allow one to take out second mortgages up to 125 percent the value of their home. This type of second mortgage is only partially tax deductible, and is rarely granted to individuals due to the limited number of people who can only qualify for it.

Home equity loans are another option, whereby a lump sum amount is given, a fixed interest rate is charged and regular repayments are made monthly.

If you have decided to apply for a second mortgage, it is recommended that you compare second mortgage rates with a number of different sources including credit unions, banks and mortgage lenders. Make sure you are made aware of all the penalties involved before submitting your application. Stay away from companies that charge penalties for any late or missed payments, as this can only add to the total amount that you need to pay. Check for any voluntary insurance that could be included with your second mortgage: you may already have the same coverage elsewhere. If this is the case, you can request for such insurance to be excluded. Finally, you should check the repayment scheme of your second mortgage: low initial payments could result in higher payment amounts towards the end of your payment schedule.

Although 2nd mortgages could be a good source of cash, you can risk losing the ownership of your home if you are unable to make regular payments. Compared to a first mortgage, second mortgage rates are slightly higher, and mortgage fees also need to be paid. Consequently, 2nd mortgages have lower interest rates compared to consumer loans, are usually tax deductible and are ideal for those in need of high amounts of cash.


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