All about second mortgage

What is second mortgage?

It is a loan taken against your home on which there exists a primary mortgage. The home equity is used as collateral for the second loan.

The second mortgage has less priority compared to the first on the same property. So, if you default, you need to clear your first loan prior to paying off the outstanding balance on the second loan.


When do you choose a second mortgage?

There are situations when you may cash out on your home equity by taking out a second mortgage.
You may have accumulated a large amount of debt through auto loans, balances on high interest credit cards and other bills (medical costs, kid's tuition fees etc) and need to pay them off.

There may be an opportunity for you to invest cash in a business. You can then use a second loan to go for it. But check out if the rate of return on your investment is higher than the second mortgage rate. Only then it will turn out to be a profitable venture.

You may plan to avoid paying private mortgage insurance. But this is possible only when you get a second loan that makes up for 20% of the home purchase price.

You may wish to repay debts and eliminate judgments, pay for your car, purchase a vacation property or plan for a vacation. You can obtain the required cash by taking out a second loan.

How much can you borrow?

A second home loan allows you to borrow on the basis of your home equity. The equity is the difference between the current appraised value of your home and the amount you have paid towards the first mortgage.

With most lenders, you can take a second loan such that the total loan-to-value ratio of your first and second loan is equal to 85% of the home's appraised value. However, there are lenders in almost all states excepting Texas and West Virginia who allow you to take out second mortgages equal to 125% of the appraised value.


What are the possible rates, terms and options?

The interest rates on a second loan are higher to that of the first loan. This is primarily because if you default, you will be paying off the first loan prior to that of the second and as such there is a risk involved in offering second mortgages.

However, you may choose either a fixed rate home equity loan or an adjustable rate home equity line of credit as your second home loan option. The lender will quote you a rate depending upon your credit score, total loan to value ratio and the current market trends. The loan term will vary from 15 to 30 years depending upon the option you choose. But in general, a second loan is offered over a shorter time period compared to a first loan.

How do you get a second mortgage loan?

Getting a second mortgage is similar to taking out a first mortgage on your home. You need to shop for a suitable loan offer by approaching different lenders and getting quotes from them. You can simply fill out a no-obligation free short form to get quotes from the community ranked lenders. Then you should compare the quotes, find out the offer that can cost you less in comparison and provide all necessary paperwork while you apply for the loan. The lender will conduct an appraisal on your home in order to determine its current value and complete all the steps that are necessary to complete the loan processing so that he can arrange for the closing. At closing, you will be signing the note and other documents as required by your lender. You will have to pay closing costs similar to that of your primary loan.

What happens to the second mortgage if you refinance the first?

When you refinance the first loan after getting the second mortgage loan, you should request your lender for a subordination of the second loan. This implies that your second home loan will be considered as a junior lien compared to that of the refinance loan. Otherwise, if you do not subordinate it, the second mortgage will be taken as the first lien and the refinance loan will take over the second lien position. In this case, there will be less risk with the second loan but higher risk involved with the refinance as a result of which the first mortgage refinance will cost you more in interest charges.

With a second home loan, you get the chance to tap a large sum of money. Moreover, you can deduct the interest on your taxes up to a certain limit. But you cannot overlook the costs and the high interest rate associated with a second loan. Besides, if you default on the second loan, you may lose your home. Therefore, prior to going for a second mortgage, it is best to prepare a budget and find out how much you can afford to pay in addition to the first loan.

Buying a New Home for the First Time

is a very different process than purchasing a previously owned home. When you are the first owner of the home, there are many considerations you have to make that used homebuyers don't have to make. For instance, you will need to decide what flooring you want, what color the walls should be, and even what color the outlet and light switch covers should be. These choices can seem overwhelming, so here are a few tips to help you tackle the process.

Start with Getting Financing Before you even begin looking for a home plan, lot, or house, make sure you have your financing in place. While you do not necessarily have to have your loan in hand, pre-approval will help you know how much you can afford. Take a careful look at your budget to determine how much you can afford to pay each month for you home. Be sure to factor your homeowner's insurance and tax bill into that monthly payment amount.

Consider the Location When it comes to real estate, location is key. You want to buy a new house in a desirable location, as this will make the resale value increase over time. Avoid living in dangerous or run down areas. Usually this is not a problem when you are shopping for a new construction, but do consider location as you shop. Also, consider the intangibles about the home's location. For instance, a home that backs up to a busy road or interstate will be harder to sell because the noise from the street detracts from the home's appeal.

Choose the Builder and Developer First Since you are shopping for a newly built home, avoid the temptation to shop based on the home itself. You will not have to worry about ugly wall coverings or carpets. Instead, choose a builder or developer first. Find out which builders have a reputation for well-made homes that they stand behind. Avoid those developers that have a reputation for throwing up a home quickly and shoddily.

How can you find out about a builder's reputation? Talk to people you know who are in the real estate or construction fields. They will be able to tell you which builders to trust, and which to avoid.

Once you have chosen a developer, you can shop for your home among that developer's subdivisions and floor plans. You will be reassured that your home will be built well, and you will also have the assurance that the value will increase over time, because the developer's reputation will stay with the home as long as you own it.

Don't Forget the Inspection Most used homebuyers would not buy without having the home inspected. This is important in a new construction too. You want to have an experienced inspector look at the overall construction of the home. This can be done even before the home is completely finished, as this gives the inspector the chance to see the quality of the building methods and materials.

Avoid Too Many Add Ons As you prepare to purchase your home, you will have a lot of decisions to make. The beauty of buying a new home is that you can choose the carpet color, paint color, and even the color of your cabinetry. However, you will be offered a variety of upgrades to your home. For instance, you may be offered an upgrade to a more expensive countertop or a Jacuzzi tub in the bathroom. This is where the builder stands to make a lot of money off of your sale.

As you make the decisions about the home, make sure the essentials are covered. However, avoid things that are going to be costly upgrades. This can increase the cost of your new home substantially, and you can always make changes later after you have finished the purchase. If you do want an upgrade, do not be afraid to negotiate, and do your research to make sure the price is fair. In the end you will have a new home with fresh paint and brand new flooring no matter what you choose, so make sure you are not paying too much for extras you can add later.

Home Equity Loan OR A Second Mortgage Refinancing

If you are looking into refinancing your second home mortgage refinancing or a home equity loan or line of credit, in some cases you may be out of luck.

If you want to refinance your primary loan, you, firstly, must convince the lenders holding any second position loans to agree to continue to be in a subordinate position behind the new primary loan. This is called Subordination.

When the housing market was in an upswing, getting lenders holding second position loans to agree to subordination wasn't much of a problem. In many cases it wasn't even necessary to ask second position loans to be carried over because the home may have increased so much in value that the second mortgage or home equity loan could be paid off in the refinance. Even if a homeowner requested that a second position loan be carried over in subordination to a new primary loan, the home's increasing value made the lender much more likely to agree to a position of subordination.

With the current housing market, this is no longer the case. Secondary position lenders are now much less likely to agree to remain subordinate. Some will only agree to subordination if you first pay down the principal on the second position loan, which puts them in a better risk position.

In other things, you may have no choice but to refinance your secondary loan. This is an option worth looking into, especially if it means a lower interest rate or a savings on your monthly secondary loan payment. The process of refinancing a secondary loan is essentially the same as refinancing your primary mortgage. If you choose this option, you'll need to shop around. Just be sure to talk to your mortgage professional and the new mortgage company about your desire to refinance your primary mortgage. If the new mortgage company for your secondary loan is no more agreeable to remaining subordinate in a primary mortgage refinance, you'll be back in the same position you started off at, if not worse.

If you are planning on refinancing your primary loan and have a second position loan such as a second mortgage, home equity loan or home equity line of credit, always be sure to contact the lenders for your second position loans first. They will take a look at your loan, the market in your area and your financial situation. They will then let you know if there are any changes that they will require in order to agree to subordination behind a new primary mortgage.

If you don't contact your second position lenders before attempting to refinance your primary mortgage, you may end up in an uncomfortable position once the secondary lender is informed of your pending refinance. Knowing in advance what your secondary lenders would require before agreeing to subordination rather than finding out when the refinance is in process will put you in a much better position. Having to stop a refinance in the middle of the process will end up being a waste of time, as well as a waste of money. You will still be responsible for paying for the refinance work that has already been done as well as any related fees that have been necessary up to the point where the refinance was stopped.

Be sure you know all of your responsibilities and options before you proceed with a refinance, especially if you have secondary position loans.

Types of Home Mortgage Loan

Choosing the home mortgage that is right for you is essential when one is involved in the process of home purchasing. Thus it is important that all options are understood.

Basically, the two things one should consider when considering a home mortgage loan is what type meets best your home purchasing needs as well as which loan offers the most ideal schedule for repayment.

Commonly the types are :

# The fixed mortgage rate loan types

# The adjustable home mortgage rates

# Jumbo home mortgage loans

# B/C home mortgage loans

# Government home mortgage loan programs

# RHS home mortgage loan programs


The fixed mortgage rate loan types

Fixed rate home mortgage loans have an interest rate that basically remain the same for the whole life of the loan.

These payments have predictable monthly fees yet you are immune to any rising interest rates. Therefore, your interest and principal payments will not increase.


The adjustable home mortgage rates

Mortgages that are adjustable in rate have rates of interest that adjust in a periodic manner as based on the exiting conditions of the market.


The rate is initially fixed during the period of its introduction (anywhere between one year to a decade) and is usually lower compared to a mortgage that has its rate fixed.


After this period, the rate then adjusts every year or about semi-annually as based on the index of the market, however it cannot go beyond the pre-determined cap adjustment.


Jumbo home mortgage loans

The amount given out on this type of loan exceeds the amount established by corporations. Since jumbo home mortgage loans are sold and bought on a scale that is smaller, they have rates that are a little high compared to other type of home loans.


B/C home mortgage loans


These types of loans are given to those borrowers that have filed recently for foreclosure or bankruptcy or those who have late payments on their reports of credit.


The purpose of B/C home mortgage loans is the offer of temporarily financing to applicants until they could qualify for type a conforming financing.


Government home mortgage loan programs

One type of government loan programs is VA loans. These types of loans are definitely guaranteed by the US Department of Veterans Affairs.


This allows service persons or veterans to acquire home mortgage loans with terms that are favorable (usually in the absence of a down payment).


RHS home mortgage loan programs


RHS means Rural Housing Service if the USDA or the US Department of Agriculture. This type of loan guarantees residents in the rural area with very minimum costs for closing. Down payments are also unnecessary.


All in all, there are a lot of home mortgage loan programs available. It all depends on your needs, wants and means.