What is A Second Mortgage?
It couldn’t be anymore straight forward realistically. You can think of a second mortgage as another mortgage but only smaller in size to the homeowner. Through the use of second mortgage companies you can use another mortgage when a home or property already has an existing mortgage. This money is typically used to help purchase a new house, provide a home for aging parents, purchase a property for your children attending university or perhaps you’re looking for a vacation home for getaways.
Here at GM Mortgages we have an abundance of great programs and opportunities that will help fit within your financial needs whatever they may be. We specialize in helping individuals who already own one property with an opporutnity to safely and properly manage multiple properties.
If you’re looking to borrow money for a second home you’ll need to have equity in your current home. This refers to the value of your home, minus the money you currently owe against it. An example of this would be if your home is worth $250,000 and you have a $200,000 mortgage, the equity in your home would be $50,000.
It’s important to understand:
- Closing costs in second mortgages can range anywhere in between 2 to 5 percent depending on the amount you borrow and the lender you use.
- A second mortgage can be used for debt consolidation or any other major purchases.
- Your current credit score will affect your second mortgage interest rate.
- The higher the credit score the lower your mortgage interest rate.
- Second mortgage interest rates are higher then your first mortgage rate but will still be lower then any credit card or car loan rates.
- A second mortgage can range anywhere from 1 to 35 years, depending on the company you work with.
- Your home will help secure your second mortgage.
Understanding Second Mortgages and Some Helpful Tips To Secure One
If there is no easier way out then a second mortgage is for you. If you’re having trouble paying your first mortgage it’s important to first check to see if you can get refinanced instead of taking a second one. Refinancing will provide equity and might provide a loan at a much better rate.
Don’t be shocked when you’re paying higher interest
Whether it’s a first mortgage or second you should always look at the terms carefully. A second mortgage may provide higher then expected interest rates because the lender will have no claim on your first property in the event of a foreclosure making their risk much higher. It’s equally as important to understand that even if you manage to keep paying your first mortgage regularly but end up defaulting on the second, you may still lose your home. Lenders of second mortgage companies can buy out your existing primary mortgage and then push forth with a foreclosure to help recover money lost.
Be sure to take notice of any extra fees
When you look to a second mortgage you’ll need to understand that the fees and charges associated with it can be quite substantial. A second mortgage requires extensive paperwork and companies will need an updated appraisal of your existing property so they can estimate the value and equity from it. Things like legal fees, appraisal fees, application costs and more can end up resulting in a significant sum.
Time Your Second Mortgage Right
Timing of a second mortgage is very important. As mentioned the loan amount depends on the current equity in your existing home which in turn can depend on a handful of other factors since you took out your first mortgage. If the economy is in a current recession and the housing market is down we recommend to wait, if possible, for housing prices to pick back up. Like with any loan, interest rates play an important role in any mortgage or loan. If rates are low and you can lock in a low fixed rate then it’s a good time to look at taking out a second mortgage.
Second Mortgages Will Always Be Limited By Your Current Home Equity
Second mortgage rates are going to be higher then anything compared to your first mortgage. Second mortgages can only rise to approximately 85% of the value of your exisiting home, but in most circumstances you’ll be looking at a range of 75% to 80%. Here’s a quick example:
If your home is worth $100,000 then the maximum amount you can borrow is 85%, or in other words $85,000. If your first mortgage still has $40,000 then you would be able to borrow $45,000 which is the amount that’s left after deducting from the 85% above. Please remember though that there will be closing costs involved.
Interest and Insurace Rates on Second Mortgages
As we’ve mentioned throughout second mortgage interest rates are higher then what you’d get from your first mortgage. Second mortgage brokers won’t post interest rates to the public because they will always be different from case to case. Your best bet is to work with a second mortgage company so they can help you decide if it’s your best option.
If you’d like to try and figure out what your second mortgage payments would like like, try out a mortgage calculator.
Qualifying For A Second Mortgage
One of the first steps in qualifying for a second mortgage is to ensure you have more then 20% equity in your exisiting home. You have to be able to pay for the mortgage without exceeding the TDS (Total Debt Service Ratio). While you can qualify for a second mortgage with a damaged credit score you will be looking at paying a much higher interest rate. Your credit score will show any lender how likely you are to be able to fulfill financial obligations on time.
Employment will also provide an advantage if you’ve spent a longer amount of time working with one employer. Stability in your job helps the lender qualify you for a second mortgage. At the very minimum you should have previous employment with at least 6 consecutive months or more.
As you go to apply for your second mortgage you’ll be required to provide basic documents like a Social Insurance Number, proof of employment, and any other documents involved your first mortgage and bank statements.
If you’re looking to learn more information on second mortgages or perhaps need a reduction in your monthly payments to open up cash flow it might be wise to consider consolidating debt through a second mortgage. To learn more on how you can increase your monthly cash flow with this process contact the experts with GM Mortgages today!