All You Need to Know About Second Mortgages
3 minute read
June 13, 2019


Following the crash of the housing market in the late 2000s, it has become significantly more difficult for homebuyers to get second mortgages. The banks have learned their lessons not to give out large loans so easily, which is why they’re much more wary about giving out mortgage loans.

They need to see your equity to know that you can afford to pay off your loan, and if not, you must have enough valuable resources that they can list as collateral. However, this doesn’t mean that it’s impossible to get a second mortgage. If this is what you’re trying to do, here’s all that you need to know:

What Is a Second Mortgage?

Simply put, a second mortgage is a smaller loan put on top of the first one. The interest rate for a second mortgage is usually much smaller than the first, and the costs and fees may not cost as much. Although there’s no obligation or limitation that forces borrowers to get a smaller loan for their second mortgage, it’s almost always a better idea to take out a smaller sum. This is especially important if you haven’t paid off the majority of the first one, as it may put you in a highly precarious financial position.

How Does a Second Mortgage Work?

Say, if you’ve bought a $200,000 house with $120,000 left on the first mortgage, the bank may follow the “80 percent rule” in lending you a second mortgage. The 80 percent rule means that the bank will give a loan that has around 80% of the total value of the first one. This is a general rule that the bank may follow if your credit score is high enough.

Keep in mind that the second mortgage will become a part of your public record. It means that the bank can use the record as a lien against you. This will be in case you don’t make the payments. This means that the bank can come in and seize your home and foreclose it to compensate for the costs that you haven’t paid.

Why Do People Get Second Mortgages?

There are many reasons to get second mortgages, such as for equity building and for business purposes. Some people simply look at it as a long-term investment with minimal risk. You can rent out the house to generate income that you can then use to pay off its mortgage; by the end of the term, you will then have two houses that will continue to make money for you.

Additionally, people may look to take advantage. Advantage of the fact that the second mortgage usually comes with a smaller interest rate. This is to get a larger overall loan while reducing the interest rate at the same time. For example, if the interest of the first mortgage is 6 percent. Then you will have to pay $6,000 on interest for a $100,000 loan. Instead, if you get the first loan at $60,000 at 6 percent interest. Then also another $40,000 mortgage at 5 percent, the overall costs will be lower.

What Can You Do With the Money From a Second Mortgage?

You can practically do anything with a second mortgage, whether it’s remodeling fees, tuition costs, or even emergency medical needs. As long as you can pay off the mortgage it is good. The bank has no authority to tell you what to do with the lent money.

If you’re looking for a trustworthy and reputable mortgage broker, Aceltis Group is here to help. Contact us today for more information.

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