Second Mortgage Loans

What are Second Mortgage Loans?

A second mortgage is a loan that is secured by your home’s equity, and it is independent of your first mortgage which remains intact. Since a second mortgage uses your home as collateral, you want to remain current with your loan payments to prevent the loss of your house. The money from a second mortgage is typically given in a lump sum, but it can also be distributed as a line of credit.

The popularity of second mortgages is growing because:

• You can consolidate credit card or consumer debt into one monthly payment and save money that would have gone to paying interest.
• You can use the money for large purchases or home improvements which will increase your home’s equity and market value.
• You generally pay lower interest on second mortgages.
• You can deduct second mortgage interest on your annual taxes.

Interest Rates on Second Mortgages

Interest rates on second mortgage loans are usually fixed but might be higher than the interest on a first mortgage loan. Other options that may be available are variable rate mortgages or adjustable rate mortgages.

The interest rate you receive on a second mortgage is influenced by a number of factors, including:

• Credit Score – A better credit score may mean a better interest rate.
• Amount of the Loan Request – A smaller loan amount is less of a risk to the lender, so they will offer you a lower interest rate.
• How much equity remains after the loan is given – If there is a sizable amount of equity still left in your home, this tells a lender that you are more apt to make good on the loan repayment.

Term Lengths for Second Mortgage Loans

The length of time you have to pay back a second mortgage will be established when you negotiate the repayment terms with your lender. The terms can range from one year to twenty years depending on your needs and ability to repay.

How Are Payments Calculated?

The lender should provide you with a breakdown of your monthly payments and how they are applied to your repayment balance. For example, some second mortgage loans call for payments that cover both the principal and interest, while some loans may pay only the interest owed each month. With an interest-only loan, the principal is not reduced each month, and you will make a full repayment of the borrowed amount when the loan term expires. This type of loan is sometimes called a balloon loan.

What are the Costs of Second Mortgage Loans?

Like your original mortgage, a second home mortgage can have costs you should contemplate before entering into the loan process. Most lenders will charge points on the money they loan to you. Each point is equal to one percent of the loan amount. For instance, a loan for $15,000 with a fee of 5 points would cost you $750 at the time of a loan request. The point charges vary by lender or mortgage company, so it pays to shop around and search out a lower fee.

Before you accept the loan, it is a good idea to get all the fees and terms in written form. The fees that second Mortgage Lenders can solicit are sometimes limited by state guidelines. To find out if there is a fee limit, you can contact the banking commissioner or consumer protection office in your state.

Where to Start?

If a second mortgage loan is of interest to you, start learning more by:

• Reviewing your current mortgage company’s offerings
• Inquiring at your bank or lender of choice
• Comparing what competing banks or lenders in your area may offer
• Researching online lenders offering second mortgages via the internet