Getting a Second Mortgage
It is a very personal thing to look into getting a second mortgage on your home. While this may sound complicated, and there are many factors that effect your decision it is rather simple. When looking into getting a second mortgage, be sure to consider a few things.
First of all, in order to get a second mortgage, you need to have a first one. You home will build value after you have lived in it several years. This value is referred to as equity. You can then use this equity as a basis to borrow against. This is what people are talking about when they speak of a second mortgage. Yes, there are risks when you get a second mortgage. However, if you take your time and focus on the details of the loan terms, you will not face many.
The first thing to focus on is to not borrow more than 80% of the current value of your home. You have to be careful in this area because most lenders allow a borrower to get up to 130% of the value of his/her home. If you know you will be able to repay the entire loan, then borrowing this large of an amount is not a problem. However, you need to understand that if you fail to repay your loan, the bank has the right to take it and sell it to pay off your first mortgage. Any amount the bank makes over and above the amount of your first mortgage will be placed on your second mortgage. By taking out the full130% of your home’s value, there will not be enough money left over to cover the cost of the second mortgage and you will still be liable for this amount. This is the reason banks suggest you do not borrow more than 80% of your home’s value.
You should also realize that most banks will charge higher interest rates for a second mortgage. When looking for a second mortgage shop around. Take the time to compare all the different options offered by banks, credit unions, and any other financial institution. One of the biggest things to compare and look at is the annual percentage rate (APR) offered by the different lenders.
Also take not of whether the loan is fixed-rate or adjustable-rate. A fixed-rate loan is just that. The rate is fixed and will never change. The APR is set at the time of loan agreement and will remain the same through out the loan until it is paid off. An adjustable rate mortgage (ARM) is one in which the lender reserves the right to change the APR on your loan. This means that your APR could increase or decrease throughout the life of your loan. This can also affect your monthly payment. If you accept an ARM, be sure you know what the limits are on the adjustments the bank can make. Take note of how much it can change, how often it can change, etc.
Another thing you need to consider when getting a second mortgage is the terms of repayment. The standard first mortgage requires monthly payments over a period of 20-30 years. Second mortgages, on the other hand, must be repaid in 15 years or less. Some second loans require a balloon payment. With a balloon payment the borrower is only required to pay the loan’s interest on a monthly payment, and then must pay the principal on the loan as one large amount at the end to the repayment period.
Even with the risks associated with a second mortgage, they have a lot of benefits and can be used for a large variety of needs or wants. This type of loan could meet your needs perfectly, as long as you are careful, considering and understanding all aspects of the loan. This means, as with any financial problem, sucking up your pride, and asking a question if you do not understand something or are not sure of something.