A second mortgage is the process of getting another loan in addition to
your original mortgage. Before entering into the second mortgage,
homeowners should carefully understand the merits and demerits of taking
a second mortgage and should also carefully analyze the different
available options.
Types of second mortgages:
There are two main types of secondary mortgage available: home equity
loans and home equity lines of credit. With home equity loans, the
lender will give you the lump sum of amount all at once and you repay it
at regular intervals over a particular time period. With home equity
loans, the interest rates are fixed.
Home equity lines of credit
are like a credit card, you can spend the money as you need it. In this
type of loan the interest rates are adjustable.
There are few
restrictions available on the second mortgage. Most people are using
this type of loan for the purpose of home repair and maintenance or for
other big expenditures. It is not a good idea to buy this loan for
something insignificant such as for new clothes or for a vacation,
because you are risking your home in the process.
Merits:
Second mortgage is having huge advantage, because it may give you a
large sum of amount that you can spend it when in need. Also, interest
rates are low and the interest paid on this mortgage is tax deductible.
Demerits:
The major drawback of a second mortgage is that the loan is secured by
your home. So, you may lose your home if you don’t do the proper
repayment. Also, you may have to pay the minimal fees (3 to 5% of your
total loan amount) to obtain it.
How much money a borrower can get?
The amount of money you can get will vary on a number of things such as
your credit score and the loan to value ratio (LVR). Most lenders won’t
provide you more than 70 to 80 % of the LVR of your first and second
mortgages combined.
Where to get a second mortgage?
You
are not having the chance to get your second mortgage with the lender
who gave you the original mortgage. You can find a second mortgage with
any other lender. Since the lender in the second position takes on more
risk, not every lender offers this type of mortgage; it will vary from
individual lender’s risk tolerance.
