Several people have heard the term second mortgage used in reference to a home loan. What is the exact meaning of the term "second mortgage"? With regard to the real estate, a single piece of property can have multiple loans, or mortgages against it.
First mortgage is the loan that is first registered with the county or city. Second mortgage is the loan that is registered second. There can be as many mortgages on a property as there are lenders willing to provide funds.
The loans loan happens to go into default are repaid in the order they were registered. Therefore, you need to pay the first mortgage first, the second mortgage second, and so on.
Therefore, subsequent mortgages are more of a risk for the lender. Lenders often charge higher interest rates in exchange for assuming the risk of lending a second mortgage.
Generally, a second mortgage will be having a shorter term than that of the first mortgage. Also present with many second mortgages are fixed amortization schedules and balloon payments.
Reasons for Taking Second Mortgage
Homeowners may take second mortgage for many reasons. Home improvement, increasing cash, paying off other debts, or investing in a business are some of the most common reasons for taking second mortgage. In some cases, the second mortgage is used as a down payment for the first mortgage when the home is purchased.
The reasons given here for obtaining a second mortgage increase the value of the home, provide opportunity as an investment in your child's future, or provide the opportunity to increase income. These are the original and most beneficial reasons for obtaining a second mortgage.
When you are choosing the second mortgage lender, you need to consider the same things, which you consider while choosing your first mortgage. Some of the primary factors that might cause you to choose one lender over another are the interest rate, repayment terms, and fees associated with the second mortgage.
Repayment Terms
Another factor that you need to consider to determine a lender for a second mortgage is repayment terms. Some second mortgage loans can be repaid in as much as 15 or 20 years. On the other hand, some loans must be repaid within a year.
Generally, the shorter the repayment period on the second mortgage, the higher the monthly payments will be. You should choose a loan with repayment schedule that falls in line with your ability to repay.
Points Charged by Lenders
Usually you need to pay a percentage of loan amount as fee for obtaining the loan. Your lender may refer to this percentage as "points". One point is equal to 1% of the amount that you borrow.
Therefore, you would pay $500 (5%) in points if you borrow $10,000 with five points as the fee. Depending upon the lender, the number of points changed will vary. This is where shopping around will pay off for you.
There is a limit on the points charged by the lenders for second mortgage in some states. To find out if there is such a limit in your state, you can check with a banking commissioner or state consumer protection office. You need to make sure that you get the amount of the fee in writing from the lender before taking the loan.
Use the Second Mortgage in a Right Manner
Nowadays, consumers are obtaining second mortgage, which is proving out to be a foe. They are not using the second mortgage for increasing the value of the home, or for educating their children. Nor are they increasing their income earning potential, they are just spending their savings.
On the whole, a bubble effect is getting created for the public due to the rising real estate prices, increasing availability of mortgage products, and the decline of savings. The bubble effect occurs when prices rise, spending rises, at a rate greater than can be supported on a long-term basis. At some point, the bubble bursts.
If the second mortgage is used to increase the value of your home, it will have insulated you against the drop in price. Your home is actually worth more; therefore, you are protected if prices drop
The original intent of the second mortgage to provide the consumer with easy access to the savings accumulated in their home for home improvements, emergency events, or to improve their homes or lives.
But, most of the consumers do not save money in a savings account; consumers only save money when they are not aware that they're saving money. One of the last hidden ways of savings for consumers was home equity.
These savings were also eliminated by second mortgages and other loan mortgage products. Has the consumer stop to consider the outcome of negative saving? Not at all, and our present system of mortgage lending encourages negative savings.
Second mortgages are a great way to access your savings and raise your income tax deductions. They are one of the greatest tools available for financial planning and beneficial consumer spending. And also, they are the fastest way to getting yourself into debt under socially acceptable circumstances.
An educated consumer understands the second mortgage consequence. The educated consumer understands the price of the second mortgage. The price of the second mortgage is the equity in your home. You are trading the equity in your home for cash when you apply for a second mortgage. You are giving up your savings.
You have made a right decision if you are trading your savings in order take a step up. You have made the wrong decision if you are trading your savings for a frivolous expense. That's how you determine if your second mortgage is your friend or your foe.
