2nd mortgage loan - Know more before choosing it as an option

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By: tiarajoseph11
on 3rd Jun,2015

When you are in need of urgent money, sometimes 2nd mortgage is the answer.
2nd mortgage loan - Know more before choosing it as an option

When you are in need of urgent money, sometimes 2nd mortgage is the answer. But are you really aware of the facts about 2nd mortgage loan? It can help you in many ways, but you must also know what are the advantages and disadvantages of a 2nd mortgage before opting for it.

2nd mortgage loan types

You can use your existing home equity and take out two types of 2nd mortgage loans:

  1. Home equity lines of credit (HELOC) - This loan normally function like credit cards. You can get the money as per your requirement, and repay the borrowed amount. The interest will be calculated as per the adjustable rate of interest.
  2. Home equity loan – You can obtain home equity loan as per the fixed interest rate of mortgage. You can get the loan amount all at once and repay it back within a fixed time period.

2nd mortgage advantages

These are some of the many benefits which you can avail through 2nd mortgage:

  1. Low rate of interest – As you are taking this loan against your existing home equity, it is considered as fully secured. So, the interest rates are quite low comparing to the other conventional loans.
  2. Interest is tax deductible - The interest is generally tax deductible to a certain extent.
  3. Urgent source of dollars - You can use your home equity and mortgage it as per your necessity.

Uses of 2nd mortgage loan

You can use the 2nd mortgage for various cases:

  1. Home improvement fund – The best way to use 2nd mortgage is to utilize it as a fund for home improvement purpose. You are risking your home equity, so use the fund to increase the value of your home.
  2. Avoid PMI – As you are using existing home equity, the lender will be risk free to lend you the money. So, apparently you don't need to go for a PMI (private mortgage insurance).
  3. Paying off debt – You can repay your credit card debts and other unsecured debts by opting for 2nd mortgage. However, you are actually replacing your unsecured debt(s) with a secured loan.
  4. Purchasing additional home – Use the borrowed amount to purchase another home. Make sure to use the fund to create new assets rather than creating new debts like spending it on vacation purpose, shopping or others.

Eligibility factors for you

There are certain factors which can determine your eligibility and decide the amount that you can borrow:

  1. Credit score – You'll need a decent credit score before applying this loan. But certainly it will not be very hard to convince the lenders as you are already mortgaging an existing home equity. So, the lender don't have to bear additional risks.
  2. Amount of existing home equity - You cannot loan more than what you have as the equity of your home. However, you can quote a lesser value loan against your home.
  3. The loan-to-value ratio (LTV ratio) – Generally, lenders will not entertain your 2nd mortgage loan application if your loan-to-value ratio is more than 75-85%. The considerable LTV will combine both your 1st and 2nd mortgage.

Disadvantages of a 2nd mortgage loan

Here are some disadvantages which you might have to face while taking out a 2nd mortgage loan:

  1. Fees – For obtaining a 2nd mortgage you need to pay certain amount as a fee. The fees generally varies between 3-6% of the loan amount.
  2. High rate of interest - You may have to pay a higher interest if you have a poor credit score.
  3. Risking your home – Taking out a 2nd mortgage means putting your home at a high risk. So, when you opt for a loan, make sure to repay the installments on time.

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