Looking for a way to use the equity you have in your home to get a loan?
Second mortgages allow you to do just that.
In this article we will be discussing the different types of second mortgages, pros and cons, and alternatives to 2nd mortgages.
What is a second mortgage?
A second mortgage is a loan that’s issued using the built up equity you have on your home. Over time the value of your home will increase making it a huge asset. A HELOC, Reversed mortgage, or a Home equity line of credit is loaned to homeowners using their homes equity as collateral. Typically, you can use money from a second mortgage for anything you want.
A Primary loan is the original mortgage on a home used to purchase the property. A second mortgage borrows against the value of the home. Typical second mortgages are taken out to make home improvements, repairs, or pay off debts.
It is not recommended to take out a second loan to do anything that will not improve your home’s value or increase your personal financial security.
Types of Second Mortgages
Home equity loans
A home equity loan will provide the borrower with a lump sum of cash that is required to be paid back in fixed rate monthly payments. Typically you can borrow up to 80% LTV, or loan to value ratio in your home. You may be able to get a home equity loan with bad credit.
Home equity lines of credit
A HELOC is a revolving line of credit a borrower can pull money out of on an as needed basis, similar to a credit card. You will not pay interest on the amount of available credit. You are only charged interest on the money you borrow.
A reverse mortgage is for borrowers that are 62 years of age or older. A reverse mortgage is a kind of second mortgage that you use your home equity to get cash. The difference in a reverse mortgage and the other types of second mortgages is that a reverse mortgage does not need to be repaid until after death.
Second Mortgage Rates
Interest rates on second mortgages are lower than typical unsecured loans because the loan is less risky because your home is used as collateral. However, 2nd mortgage rates will be higher than current mortgage rates. This is because the primary lien holder (first loan mortgage company) gets repaid first in the event of a defaulted loan. A second mortgage with bad credit is difficult to qualify for.
Advantages of second mortgages
- You can pay off high interest debt
- Make home improvements and repairs to increase the value of your home
- Write off interest from a second loan
- Second mortgage loans have lower rates than other types of loans
- Use for debt consolidation
Disadvantages of second mortgages
- Lose your built up equity in your home
- Increase monthly payment obligations
- Inability to pay second mortgage results in losing your home
- Higher rates than the primary mortgage loan
Second mortgage alternatives
Before getting a second mortgage you need to be aware of the potential drawbacks presented in this article. If you are looking for a home improvement loan or just looking for a lower mortgage payment they are alternatives to 2nd mortgages you should consider.
Cash out refinance
A cash out refinance differs from a second loan because a new loan is given for the property and extra cash all in one loan. You will just have a single loan to repay and still receive cash using your homes equity.
A cash-out refinance will have a lower interest rate because it will be the primary loan. Second mortgages have higher interest rates than primary loans because the primary loan takes precedent over the second. Cash-out refinances are available in fixed-rate and adjustable-rate mortgages.
If you have a Government backed mortgage you can do an FHA streamline refinance to reduce your rate and MIP fees. Using a streamline refinance is quick and easy, they require minimal paperwork and do not require income verification or a credit check. Streamline refinances are a great way to lower your interest and reduce your monthly payment.
The Home Affordable Refinance Program is for borrowers who have a loan owned by Freddie Mac or Fannie Mae. The government program allows borrowers to refinance their loan and reduce their monthly mortgage payments. The HARP program is aimed at borrowers with little to no equity in their home.
Another alternative to a second mortgage is to get a credit card. If you just need access to some extra cash for uses other than making home improvements or paying off debt, then a credit card makes the most sense.
If you need to borrow $10,000 and you get a 2nd mortgage, if anything happens and you cannot pay back that debt, you lose your home. Credit card debt is unsecured, if you face financial hardship and can’t pay the credit card debt you don’t lose your home.