What Is A Second Mortgage?
A second mortgage is a lien to secure a loan against your property. It is in second place to an existing first mortgage. Where a first mortgage has the right to sell your property if you are in default the second mortgagee must first bring the first mortgage up to date before the second mortgagee can enact any power of sale procedures against you.
When Should You Consider A Second Mortgage?
Most lenders will provide a first mortgage for you to initially purchase a property. They do not usually provide additional increases to that mortgage for other purposes and for smaller loans. A second mortgage is usually at a lower interest rate and has a longer amortization schedule than a bank loan so the monthly payments are lower than a traditional bank loan. Some circumstances where a second mortgage could make sense could be the following:
Debt Consolidation:
if you have a lot of small loans at high interest rates and short amortization periods your monthly payments can become overwhelming. A second mortgage at rates lower than credit cards and store cards and at a longer amortization period can allow you to lower your total monthly payments and provide a path to eventually paying off your accumulated credit card, store card, and other debts. This should be used as a disciplined path to getting rid of your total debts. The new lower monthly payments should not be taken as a license to accumulate more debt.
Credit Repair:
This can be similar to debt consolidation. If your credit rating and the equity position in the property you own will allow it sometimes a second mortgage can be sued to pay outstanding negative credit. Again a disciplined approach needs to be used to pay down your existing debts and to avoid accumulating new debt.
Business Opportunities:
Sometimes a business venture that you know you can handle and that you know after careful analysis will make you a substantial return on investment comes along. If you don’t have the ready cash and the bank is either reluctant to fund your new venture or the terms and amortization of a proposed bank loan are too arduous or expensive (ie the interest rate and amortization period make the investment untenable) a second mortgage with perhaps lower interest rates and a longer amortization period may reduce the cost enough to make the proposed investment viable. This presupposes you have conducted a careful assessment of your skill levels, the available market for the venture, all of the costs and equipment required, your position compared to potential competition, you know beyond any reasonable doubt that you can make this work, and you have the discipline and time necessary to ensure this undertaking will be successful. This can also involve a more passive investment that will guarantee a worthwhile return on the money invested from the second mortgage.
Renovations:
Sometimes the renovations and repairs may be just to increase family comfort and utility. Sometimes it may be to increase the value of your home and/or to prepare it for sale. Again the bank may be reluctant to loan you the money you require or the amortization schedule and/or interest rate may be too high to make this effective for you. In that case, a second mortgage may be the route to go.
Refinancing:
Usually refinancing involves a new first mortgage at better rates and terms or perhaps a higher principal sum. Interest rates are about to rise. Once they become substantially higher it can be a worthwhile exercise to assume an existing lower rate first mortgage which usually has a lower principal sum outstanding than you need to purchase the property and to offset the outstanding required principal with a second mortgage. This requires a careful assessment of all the costs and fees associated with a new first mortgage versus assuming the existing first mortgage and adding a second mortgage for the balance required.
Education, medical issues & emergencies:
Life can be unpredictable. You or your children may need more education, to meet an uninsured medical emergency or any one of a series of unexpected and expensive challenges. Provided your credit rating, income level, and equity position allows it, a second mortgage may be the answer to your problems.
In many cases, an equity line of credit which is a type of lender-generated second mortgage may be the answer to your challenges. The line of credit is a lien registered against your property with a limited maximum amount that you can borrow. However, you only pay interest on the amount you withdraw and for the time period it takes to pay the balance back.
While banks and credit unions do make second mortgage loans sometimes their requirements are too arduous and cumbersome to meet your immediate requirements. The borrowers for all mortgages including private first and second mortgages must meet certain specified income, credit, equity, and job stability constraints but the prerequisites for a private first or second mortgage are usually less stringent than they are at traditional lenders.
