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Second Mortgage
from: Loan & Credit FactsMany homeowners consider adopting a second mortgage on their property. This type of loan is secured with the same collateral as the initial home mortgage advance. This second loan is subordinate to the original.
It may seem unlikely that a lender would provide funds for a home that already has a loan against it. However, in real estate a single property can have multiple liens and loans. The first mortgage is registered as a first position trust deed.
The second mortgage is registered as a subordinate lien against the same property. In very rare cases, a singe property can have a third or a forth mortgage. The third and forth loans are quite unusual and most lenders shy away from such agreements.
If the loan goes into default, the initial loan is paid off first. The next loan is paid off later in such an instance. This makes the subordinate loan quite risky for the lender and it also makes getting one of these loans a little more difficult.
The consumer can expect to pay a higher interest rate on an additional loan. This ensures that the lender is compensated for the risk that it takes in the process. The homeowner can pay off the loan by making slightly higher payments than required in some instances.
Home Equity Loans
Some homeowners may be surprised to discover that a second mortgage can take the form of a home equity loan. In essence, the two are pretty much the same, at least from a financial point of view. The major difference seems to be a matter of syntax.
A home equity loan refers to the debt and a mortgage focuses more on the legality of the agreement. Some homeowners feel a little more comfortable taking out a home equity line of credit or loan rather than a second mortgage because they seem less intimidating. However, they are essential the same thing when you take a purely financial perspective.
Term Length
The term length of a second mortgage depends greatly on the lending institution and the borrower. Some agreements are arranged to take twenty years to pay off in full. Others may be paid off in a year or two.
Lender Requirements
Lenders do not want homeowners to default on their loans. In most cases they take great care to assure that applicants are able to pay the debt comfortably and within the specified timeframe. There are some things that lenders look for before granting a second mortgage.
There should be enough equity in the first mortgage and the homeowner should show a capability to pay. The capability to pay is typically measured with a debt-to-income ratio balanced with a healthy credit score. The applicant’s work history will be a factor as well.
Homeowners should look into refinancing their first loan before applying for a second loan. In many instances a simple refinance loan can take care of the homeowners’ needs. It is also much more difficult to get approved for refinancing if you already have a second mortgage.
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