When you borrow money from a lender against the overall price of your property in addition to an initial mortgage agreement, it referred to as a second mortgage. The reason that you can use the property twice to gain a loan is that assets gain value as time passes, which is why banks are able to offer a secondary loan.
Homeowners often use it in pursuit of bigger, more substantial projects without selling their house and banks can increase the total loan which will have interest added so they can make more money.
Why is it called a second mortgage?
It’s a secured loan that uses your house as collateral and works similarly to the scheme homeowners used to purchase the property in the first place. So if we consider your purchase loan as the first loan that took place before the property was yours, this will be the second one, hence the name.
They are also called home equity loans which is related to the market value of your house. Your goal as a homeowner is to have that equity growing over time, not decreasing. There are some main factors that can turn your house equity in your favour or against you, for instance, if you make your repayments on time, the overall balance is reduced hence your equity increases.
Also, when the real estate market is strong, it increases the value of your property which means that your equity is increased. This means that a second mortgage will have a negative impact on your home equity by decreasing it.
When you apply and get approved for a second mortgage you can receive it through various forms:
Lump Sum: This is the standard, one-time loan that gives you a lump sum of cash for you to utilise. You’ll repay it following the terms of the loan, over fixed monthly instalments. It is advisable to always pay a little extra because second mortgage repayments usually pay interest, not the actual balance. That means paying a second mortgage for a long period of time.
Lines of credit: This secured loan works slightly like a credit card. Your borrower gives you a line of credit with a limit, you can draw money from it as much as you want and you have the option to not use the money but keeping the line open for when you need it. This means the ability to draw money from the line of credit, repay and borrow again and again.
Loan amount: This type of secured loan allows homeowners to borrow a substantially large amount of money, more than with a personal loan or any other types of loan. The exact amount will vary depending on the creditor but can take about 70-80% of your home value.
Interest Rates: Second mortgages do offer lower interest rates than other forms of loans, mainly because putting your property as collateral reduces the risk for the lender to borrow.
Foreclosure: This is a great risk that homeowners can have when considering a second mortgage, you’re putting yourself in a situation where you can lose your house if you fail to meet the repayments on time. The Pros and Cons of Second Mortgages
When you borrow money from a lender against the overall price of your property in addition to an initial mortgage agreements means that you got a second mortgage. Assets gain value as time passes which is why banks and homeowners use this option. Homeowners often use it in pursuit of bigger, more substantial projects without selling their house and banks can increase the total loan which will have interest added too.
Cost: Just like with the first mortgage, it will be expensive and may take a long time before you can pay off the debt. Even though interest rates for second mortgages are lower, they are usually higher than the interest rate of your first mortgage.
If a second mortgage is an option you want to pursue, you should think carefully on how you’ll spend the money. Most people use the money from a second mortgage to do home improvement projects, but always keep in mind the risks entailed.
Depending on the reason why you need the money, you can search for different sources of income. Right now many people are looking to recover money from mis-sold PPI policies as they can be significantly large.
Alternatively, if you’re considering a second mortgage seek the support of a financial advisor who will be able to justify whether you are capable of increasing your loans and can continually meet the repayments.
So if you’re considering this option, think it through very carefully.