Taking Out a Second Mortgage: What You Need to Know

 

So, you have finally purchased your new home. With it comes the responsibility of paying off the mortgage every month. Suddenly, you find out your new home is in need of serious repairs that requires serious cash. After considering all the available options, you realize the best bet is to get a second mortgage on your home.

A second mortgage is a loan that you take out against the value of your home. These types of loans are good if you have built up enough equity in your home. If you are confident in the value of your property, or those planned renovations might add to its value, then you’ll need to know the basics behind second mortgages.

Additional mortgages affect credit, so whether you’re looking to purchase homes for sale in Albuquerque, NM or any other city, so understanding how second mortgages operate is crucial if you plan to buy a new home or sell your home in the near future.

Borrowed Amount

All second mortgage loans are paid out in a single lump sum. How high this sum can be is dependent on a number of variables.

The equity in your home is the first factor. In order to determine a property’s value, you’ll have to arrange an appraisal by a certified professional. You could do the appraisal yourself, but lenders will insist on an unbiased opinion. For this service, you will be charged a closing cost of $330.

Once the appraisal is completed, you’re entitled to a payout within the 75-85% of your loan-to-value ratio.

Interest Rates

Another enticing perk of second mortgages are the low interest rates. Since home equity comes into play, the interest rate for a second mortgage may be paid out according to a variable rate.

Variable rate, or adjustable rate mortgages, allow for a periodic rate over the life of the loan. The debt you have to pay remains constant and only adjusts on a predefined schedule. Adjustments to the debt are arranged by contract, often with limits.

It should be obvious that payments to your second mortgage are to be made in addition to your first. For this reason, the lender of the first mortgage also has precedence in the negotiation of the second.

Loan Terms

The loan term of a second mortgage can vary between anywhere from a year to 20 years maximum. While the short pay-off period may be enticing to those who expect to earn more in the future, you could end up with more than you bargained for. Selecting a 7 year payment plan for a loan of $300,000 could leave you owing twice the amount on a 3% interest rate. This does not factor in sudden rises in interest or devaluations of your property.

Mortgages with inflating loans and costs are called “balloon mortgages.” Balloon mortgages carry the same promises, but with greater risks. If your home depreciates, then your chance of refinancing to a livable debt is slim.

Alternatives

If a second mortgage is not promising to you, then try lowering your debt in “points.” Points are measured in one percent of the borrowed amount. These rates vary so always do your homework on prospective mortgage companies. Check with your consumer protection office regarding state limits on loans.

 

 

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