Second Mortgages
When you need to take money out of the equity in your home you may consider getting a second mortgage. Paying for large expenses like children’s college, weddings, home improvements, and other big ticket items may require you to take some of the money out of your home, but many people wonder what a second mortgage is, and if it is just better to refinance.
A second mortgage is a new mortgage loan on your home that takes second place to your first and original mortgage loan. Some important facts to know about second mortgage loans include:
- Many people have second mortgages on their homes. It does not mean that you are in financial distress if you take a second mortgage on your home.
- A second mortgage may be cheaper than refinancing. When you refinance a mortgage loan the closing costs and fees are based on the size of the loan. For instance, if you currently have a $100,000 first mortgage and you want to take $30,000 out of the equity in your home, if you refinance you will be getting a new first mortgage loan for $130,000 so you would pay fess and costs on this amount. Compare the fees and costs to taking a second mortgage for only the $30,000 you need and leaving the original mortgage in place and you could save a lot of money.
- Interest rates are higher for second mortgage loans than for first mortgage loans. This is due to the fact that they are the secondary lien holder on the property which is riskier. Even though these interest rates are higher you may still save money by getting a second mortgage over refinancing because of the lower costs associated with the loan origination.
- It could also be beneficial to get a second mortgage over refinancing if you have a great interest rate on your current first mortgage and market rates now are higher. For instance, if your first mortgage interest rate is 5% and the current rates are 7%, it saves you money to take out a second mortgage loan so that only a small portion of your total mortgage amount will be at the higher interest rate.
- You can pay off your second mortgage faster. If your second mortgage has a higher interest rate, then consider making extra payments on the principal of the loan whenever you can.
- The first mortgage loan holder gets their money first when the home is sold. In the case you sell the home or default on the loan and the mortgage is foreclosed, the first mortgage lender is the primary lien holder and they get paid first. So, in the case real estate market rates drop in your area or the home sells for less than what is owed, then the second mortgage lender will not get their full loan amount returned from the sale of the home. This means that you will still owe them the balance of the loan that the house sale fails to pay off, so be careful not to over extend yourself when taking the equity out of your home with a second mortgage loan.
Make sure you compare the positive and negative effects of second mortgages and refinancing before you make a decision. Compare the costs and interest rates and choose the one that will save you money and get you the money you want out of your home.
Go back to MyLoanStation's Home Page to find out about other loan program types available for your home financing.