A second mortgage is essentially a second lien placed on a home that is subordinate to an existing loan or mortgage. Usually called secondary mortgage holders, the second mortgage then falls behind the first loan by default.
Second mortgages are usually riskier to lenders and therefore generally have a much higher interest rate than other first loans. This is why second mortgage holders tend to use the mortgage as leverage to obtain financing. The first time home buyer who uses the secondary mortgage to obtain financing can receive a lower interest rate than the loan rate the lender would charge if the borrower had been paying off the original loan.
Second mortgage holders may also use the primary mortgage for purposes other than acquiring financing. If a home has a fixed rate and the buyer intends to use the equity in the home to obtain an additional loan, a second mortgage holder can place a second lien on the home. This will allow the secondary holder to access the home without being responsible for any additional costs, such as closing costs, mortgage insurance, and closing fees.
Second mortgage holders also can use their second lien to acquire land. In many states, land can be transferred from the first mortgager to the secondary mortgage if the first mortgage is unable to meet the terms of the mortgage. This is known as a land contract, and it requires the consent of both the mortgager and the owner of the land.
Second mortgage holders who use land contracts can also acquire the same advantages as those who use their first mortgage to obtain financing. However, they must pay the taxes and other costs associated with the land as well as other expenses associated with acquiring the land.
Second mortgages offer higher interest rates than first home mortgages. They also typically carry longer amortizations periods and lower points. Because of these differences, these loans are generally given out on homes that have appreciations in value and do not have appreciations that will not last very long.
Second mortgage holders may not own the home outright and therefore may still need to be able to secure financing from a bank or other lender on the home’s equity. In some cases, they can even borrow additional funds from a third party lender. These sources usually charge higher rates of interest than banks, especially since the lender has more leverage.
Second mortgage holders should avoid securing a second loan against a home that has no equity in it. The lender will typically want to see an appraisal done to verify the home’s value before giving any money out on the property. Once the appraisal is completed, the lender will work with the homeowner to determine if they can get a loan based upon the appraisal.
Second mortgage holders can get approved for a loan based upon an interest rate that is significantly higher than the interest rate on the home itself. For example, if the appraised value of a home is significantly less than the amount owed, the lender may be willing to lend you more money. On the other hand, if the home is worth more than the appraised value, the lender may be willing to give you less money back. If the home is worth less than the amount owed, you may not be able to get approval for a second mortgage loan based upon its value.
Second mortgage holders who own second mortgage loans on homes that have appreciations that are expected to last only one year should consider refinancing with the original homeowner. When the house values increase in value, the second mortgage holder can then refinance and take over the mortgage payments.
Refinancing for a second mortgage will require a lender to verify that the appraised value of the home exceeds the amount owed on the mortgage and that there are sufficient assets to cover the loan. A lender will also want to know what type of mortgage payment schedule you have set up with them. If the property has multiple payments, they will want to know if you are willing to change the interest rate and prepayment penalties. When refinancing, the lender will want to check to make sure that you have an affordable payment schedule for the loan and to make sure that you have adequate collateral to support the new loan.
If you have decided that refinancing is an option for your second mortgage, do not wait too long before getting started. Mortgage refinancing can help you save a lot of money over time and can help you secure a good rate of interest, even when interest rates are at historic lows.