What is a Second Mortgage?
As the name suggests, a second mortgage is basically a second mortgage on your home. The term second implies that in case you default, this loan will not have priority on your home. Instead, priority is given to your first mortgage. Funds are given towards the second mortgage only after the first one is paid off.
Second mortgages are typically useful for times when a lot of money is needed and you do not have enough cash in hand, neither do you have unlimited credit on your credit cards. Most people who second mortgages usually do so for any one of the following reasons:
• Making improvements in the home
• Buying another home
• Debt Consolidation Programs
• In order to avoid Private Mortgage Insurance
Are Second Mortgages Good or Bad?
Though second mortgages are sometimes the only way to raise the required sum of money, you have to keep in mind that you are borrowing against your home. In effect, you are risking your home every time you use a second mortgage.
While it may be tempting to tap into the large source of money via second mortgages, it can be catastrophic if you find you are unable to repay the loan at a later stage. When considering taking a second mortgage, make sure that whatever you intend using the funds for is worth the risk you are taking.
Rates are Usually Higher
Another distinctly negative aspect of second mortgages is their higher rates of interest as compared to the rates of senior mortgages. This is essentially because the second mortgage gets paid off only after the first one is paid and also because of the extra services that need to be paid for. Sometimes, depending on how much you require and how long you’ll require it for, second mortgages are simply not viable because of the heavy fees involved.
Second Mortgage Costs
Even prior to putting in an application for a second mortgage, it is advisable that you work out and budget for the probable costs, which would include the monthly payment as well as the appraisal fee, application fee and other costs of getting your second mortgage processed.
You will also be required to cover the closing costs, which includes the process of doing a title search for your second mortgage. Keep in mind that even if your application for the 2nd mortgage is declined, the processing costs are usually non-refundable. It is advisable to always ask for a printed list of all miscellaneous fees before putting in an application for a second mortgage.
Compare Lenders for the Best Deal
Always compare different lenders when applying for your second mortgage. Choosing reputable, established lenders who are willing to disclose all costs before hand can save you a lot of heartache at a later stage. Beware of lenders who offer irresistible deals but are unwilling to discuss the processing costs in detail.
Too late, you may find out that you’ve missed something in the fine print. As much as possible, avoid second mortgages that impose default penalties for missed payments. Though you may have every intention of paying on time, an oversight or a missed date could become very expensive.
Julia Vakulenko is a licensed broker associate with Tampa4U.com Realty. She has one of the hardest working Tampa Real Estate team in Florida. Please feel free to copy any of Julia’s articles as long as you credit her and a link to her website. Include our Tampa Real Estate Blog to your regular reading as well.