A 2nd Mortgage typically refers to a secured loan (or mortgage) that is subordinate to another loan against the same property. Please note, a 2nd Mortgage does not replace your existing first mortgage. It’s simply another mortgage on your home – a loan secured against the property.
In real estate, a property can have many loans or liens against it. The loan which is registered with county or city registry first is called the first mortgage. The loan registered second is called the 2nd Mortgage. A property can have a third or even fourth mortgage, but those are rarer.
Why would you risk your home with a 2nd Mortgage? These types of loans are appropriate for times when you need a lot of money. Taking out a big sum of money requires you to put up collateral and property usually holds the value that is needed as collateral against default. Many second mortgages are used for debt consolidation, home renovations, home equity lines of credit and buying more property.
Types of 2nd Mortgage: Home equity line of credit and fixed-rate mortgages. The rate in question is the interest rate that accrues on funds that you, as the borrower, use. With a home equity line of credit, which is considered an adjustable rate mortgage, the interest rate remains the same for a specific amount of time and then the rate changes based on a specific index. The fixed rate mortgage is just what it says – the interest rate is fixed on this mortgage throughout the life of the loan.
Why would you want a 2nd Mortgagerather than just redoing your current first mortgage? There are two reasons for it. Firstly, it is fast and simple because the approval is based on your home equity and not your earnings, your job stability, or whether or not support payments are being received or paid on time. Secondly, for one reason or another you would prefer not to touch your current 1st mortgage loan financing.
2nd Mortgage are called subordinate because, if the loan goes into default, the first mortgage gets paid off first before the second mortgage. Thus, second mortgages are riskier for lenders and generally come with a higher interest rate than first mortgages.
During the qualification process, lenders take into consideration how much equity you’ve accumulated in your home; they also look at your income and the length of time you’ve been working with one employer as well – this is a measure of stability and your potential to pay the interest. The biggest factor though in qualification is going to be equity in your home (the appraised value less existing mortgages on the property). In most cases, poor credit and even lack of income can be overlooked and you can still get approved for a 2nd Mortgage.
Like a first mortgage, a second does have closing costs that some estimate can run up to five percent of the value of the 2nd Mortgage. Fees and costs associated with closing on a 2nd Mortgage, no matter why a borrower might use it, include a home appraisal fee, legal fees and title-related costs (like the title search and required title insurance.)
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