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A second mortgage loan can be a great way to borrow money when you are in need. Unlike a regular mortgage, a second mortgage does not have priority on your home if you default on the loan. Your first mortgage would be repaid by your home's value before any funds go towards paying off the second mortgage. Second mortgage loans are most appropriate in situations where you require a large sum of money. Two common issues that may warrant a second mortgage are large home improvement projects and debt consolidation. While it may be tempting to take out a second mortgage in order to get money, remember, if you fail to adhere to the payment schedule, you could end up losing your home.
Second Mortgage Interest rates and Fees
Typically, second mortgages come with higher interest rates than a first mortgage. This is because that in the event of a default, the second mortgage will not receive payment from the home's value until the first mortgage is paid off. This makes a second mortgage slightly more risky for a lender. Also, there are high second mortgage fees associated with the application for a second mortgage loan. Sometimes, these fees may discourage you from taking out a second mortgage depending upon how much money you need and for what purpose you need it.
How to Find a Great Second Mortgage
- Shop around for the best second mortgage. By contacting several different banks, brokers, and credit unions, you can have companies compete to offer you the lowest interest rate on a second mortgage. Make sure to pay attention to additional second mortgage loan fees as well during this process.
- Avoid second mortgages that include penalties for lay payments and defaulting. While there aren't any homeowners who plan on making delinquent payments on their second mortgage, sometimes the unexpected may occur and leave you unable to make a payment on time. Additionally, clerical errors may delay the posting of your payments. No matter what the situation, you don't want to be charged hefty fees and higher rates for late payments on your second mortgage, so try to avoid lenders that offer these types of packages.
- Make sure you read and understand all the terms of your second mortgage loan. Some lenders offer second mortgages that seem to have extremely low rates - until the payments balloon and soar through the roof towards the end of the payment schedule. Make sure you pay careful attention to any documentation you sign. If you are not confident in your ability to judge the fairness of a contract, consider hiring a lawyer.
- Be aware of all the costs involved in getting a second mortgage. Aside from the regular payments on your second mortgage loan, there are other costs to consider in the process. Appraisal fees, points, application costs, and closing costs can all increase the total amount you have to spend on your second mortgage. Keep these in mind when planning a budget.
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