Mortgage Tips

If you already have a mortgage on your house and need money urgently, you can go for a second mortgage. In second mortgages, which are also know as second lien loans, borrowers who have some equity in their home take out a fresh loan against a property that already has a mortgage on it.

A second mortgage is both consecutive and subordinate to the first one. It is called a subordinate mortgage because if you default on the loan, and your property goes into foreclosure, the second mortgage will be paid off only after the first one. You can apply for a second mortgage with a new lender or even with your existing lender.

This kind of a mortgage can sound very tempting when you urgently need a large sum of money, which simply isn’t available to you from elsewhere. However, you need to be aware of some pitfalls associated with a second mortgage. If you haven’t planned out your payments, you could even end up losing your home. Here are a few things you should consider before taking out a second mortgage.

Go for it Only If You Can’t Refinance

Go for a second mortgage only when you are sure there is no easier way out. If you cannot pay your first mortgage, see if you can get it refinanced instead of taking a second one. With refinancing, you still retain equity in your property, and you might get the loan at better rates.

Be Prepared to Pay Higher Interest

Look at the terms of the mortgage carefully. The interest rate might be quite high, because as the second mortgage lender does not have the first claim on your property in the event of a foreclosure, his risk is significantly higher. You should also know that even if you keep making payments on your first mortgage regularly but default on the second mortgage, you could still end up losing your house. Lenders for second mortgages can buy out the primary mortgage and then foreclose to recover their money.

Be Aware of the Fees

Fees and charges for a second mortgage can be quite substantial. There is extensive paperwork required, and the lender will also need a fresh appraisal of your property to estimate its value and your equity in it. Application costs, appraisal fees, legal fees etc can amount to a significant sum.

Timing is Critical

When you are going for a second mortgage, the timing of taking the loan is very important. The loan amount will depend on how much equity you have in your house, which in turn depends on how the value of your house has changed since you took out the first mortgage. If the housing market is down, wait, if possible, for the prices to pick up. Like in any other loan, interest rates play a very important role in second mortgages. If interest rates are low, it a good time to take out a second mortgage, especially if you can lock in a fixed rate.