Simply speaking, a second mortgage is the mortgage taken out of an already mortgaged property. Second mortgages enable you to use the equity in your home for various purposes. You could use it for debt consolidation if you have bad credit, or need to pay off other loans, if you need to renovate your home or make an investment, require emergency funds or other such situations you could use second mortgages as a tool to make your financial condition better. Yet people often have some doubts about second mortgages and we seek to clarify them.
Second mortgages can be of various kinds
You could opt for a revolving HELOC which gives the borrower constant access to equity as they pay off the principal amount. Second mortgages can also be in the form of closed mortgages where you take a lump sum of cash from the equity in your home, and pay it off gradually. Be mindful that HELOC’s are mostly available to urban dwellers with a strong credit profile. But if you have credit issues or insufficient income, private mortgages may be your best bet.
Nature of collateral in second mortgages
While thinking of taking out a second mortgage you must know that your home will serve as a collateral to the lender. In other words, in case you fail to make payments, the lender has the option of foreclosure just like the initial mortgage. But it also means that your interest rate will be quite low.
The value of the amount that can be borrowed
This is a common question that most borrowers have in mind: what is the amount I can borrow? The amount you could borrow is directly proportional to the equity you have built up in your home over the years. Lenders usually take second mortgages into consideration and have limits on the loan-to-value (LTV) ratio. Usually, a majority of second mortgages will allow you to access up to 80% of the equity in your home. Closed mortgages however, allow you access to a bigger sum of equity. If you engage the services of a mortgage broker they may be able to guide you better with your specific case.
Private lenders may have less stringent qualifying guidelines
If your mortgage broker advises you to go with a private lender given your financial outlook, you may have to face less stringent qualification criteria than what the traditional lenders such as banks have. This is because private lenders can have their own terms and have to follow regulations such as bank policies guiding them which is a bonus for the borrower.
Just like when you shop around for your first mortgage you compare interest rates you must do the same with your second mortgage as well i..e compare rates offered by different lenders.