A second mortgage is a loan against your home, which is subordinate to the first loan secured against the same property. The term ‘second’ is prefixed to the name because if the loan goes default, then the first mortgage gets paid before the second. For this reason, second mortgages often carry higher rates of interest.
Second mortgages allow you to convert the equity in your home to liquid assets, which helps when you are going through a difficult financial phase. Homeowners also take out second loans for important stock market/real estate investments or home improvements. The prospect of using the equity in your home may look alluring, but you should take out the mortgage only if you can justify the investment. Here are a few basic tips that will guide you through the process of getting a second home loan.
Choose APR smartly
Before choosing APR on the loan amount, you should talk to various sources. Contact at least one bank, one dedicated lender, and one credit union to secure the best available rate. Do not choose the first lender that you come across. Despite foreclosures and a struggling economy, you can still get competitive rates. Request for quotes from online lenders also. Try to negotiate a low rate of interest if you have a good credit score and sufficient home equity, to avoid making additional payments.
Avoid default and prepayment penalties
Be careful not to get locked in on a mortgage that comes with a prepayment penalty. You will have to fork up a significant amount as a penalty if you pay off the loan earlier than the specified term. So your plans of getting out of debt soon can come to a standstill if you are stuck with a prepayment penalty. Also avoid second mortgages that come with default penalties, which are imposed on missed or late payments. It is advisable to go for second mortgages that have flexible terms and agreements.
Do not include insurance policies
Some second mortgage schemes come with various voluntary insurance packages. These can inflate your monthly repayment and make it difficult to continue making payments in the long run. Besides, you might already have those insurances covered under different schemes. In such a case, including these policies become unnecessary. If you want to opt for insurance covers, you can get them done separately instead of securing them through a mortgage scheme.
Avoid balloon payments
When the lender offers a very low monthly payment schedule, check whether there is a balloon payment involved where you will have to pay a large balance amount at the end of the loan term. While initial low payments may look attractive, you may struggle to make a big payment towards the end and even end up defaulting on the mortgage.
Taking out a second mortgage is an important financial decision, one which needs careful evaluation. Even though you are essentially using your home’s equity, you are also creating debt. So, a thorough number crunching is necessary before taking any hasty decisions. Draft your monthly budget and see if your income can cover living expenses and monthly debt payments comfortably. Importantly, borrow from a reliable lender and choose a competitive mortgage product.