What is Second Mortgage
The term second mortgage refers to a secured mortgage or loan which is borrowed against a property. In the field of real estate, properties can have multiple liens against them. Loans that are registered with city or county registries first are known as first mortgages while liens registered afterwards are considered second mortgages. Properties may have a third and fourth mortgages but these are unusual.
Second mortgages are also referred to as subordinate because if the borrower defaults, the first mortgage is to be repaid first and before the second one. For this reason, second mortgages carry more risk for the creditors, coming with higher interest rates than the first mortgages.
In the majority of cases, second mortgages are home equity loans, with this term being used interchangeably with the second mortgage, from financial point of view. The difference here is that mortgages do not denote debt but the legal lien instrument.
Second mortgages vary in terms of length. Repayment terms can be as long as thirty years or as little as one year. When applying for a second mortgage, creditors look at the following conditions: high credit score, low debt-to-income ratio, considerable equity in the first mortgage, and solid employment history.
There are some cases in which persons may want to take a second mortgage, cashing out some of their home equity. A second mortgage is taken when the borrower has accumulated a large debt and has to pay it off. As a part of another scenario, one may want to start a business or make an investment and needs some capital. Here, it is important to ensure that the interest rate on the mortgage is not higher that the return on the investment, with the borrower ending up in debt. A second mortgage is a preferred solution is case the debtor wants to avoid paying for private mortgage insurance. This becomes possible by getting a second mortgage which makes up twenty percent of the purchase price of the property. As another variant, the borrower wants to purchase some expensive item such as another property, new home appliances, or a new car. Finally, one can get a second mortgage to remodel and add value to his/ her home.
In order to obtain a second mortgage, the debtor goes through the same process as with the first mortgage. This involves comparing quotes and going with the offer that works best for the borrower’s particular circumstances. The creditor appraises their home as to find out its present value and completes the necessary steps to process the loan, arranging for its closing. At closing, the borrower signs the note, together with the security instrument which is required by the creditor. The borrower pays the closing costs in a similar way to what he/ she paid when getting the first loan.
Apart from financing major purchases, a second mortgage can be used for debt consolidation. Naturally, one’s credit score will have an impact on the offered interest rate. The higher the credit score, the better the terms that come with the second mortgage. On the other hand, while the interest rate is higher than on first mortgages, it is lower than that on car loans and credit cards. In the typical case, the interest rate on the first mortgage is between 1 and 2 percent higher than that on first mortgages. Creditors do not make second mortgage rates available to the general public; so, the borrower gets an interest rate quote when applying for a second mortgage.