Some people looking to buy a second home for either their own leisure or to possibly resell in the future will look into mortgaging that home as well. Many wonder if this is even possible, can you pull out a new mortgage for another home? The answer is yes, you can. However, there are a few things to understand.
Second Homes and Mortgages
When getting any loan, including a mortgage, the lender will calculate your credit score and will also look at your debt. If you already have a mortgage on one home, keep in mind that every dollar owed on that mortgage counts towards you being in debt. This debt ratio weighs heavily in the lender’s calculations. What that means is, even if you can handle the payments of this mortgage perfectly fine, the interest rate will be considerably higher.
If the interest rate and payment plan is manageable and beneficial for your plans, then by all means look into getting that mortgage and the second home. It is difficult for most people to be able to do something like this due to the high costs of mortgages, but some people can definitely handle it.
Another possibility is to use the equity on your current home instead. If you own a good chunk of the equity on your current home, you should consider looking into a home equity loan or line of credit. These forms of loans against the home are essentially a 2nd mortgage on your first home and the interest rates are fairly low. This is a much advised option if you have ownership of a good amount of equity in your home.
Buying a second home and mortgaging it in addition to your first mortgage is definitely possible. But, especially in this case, it is extremely important to look into all options available since it gets trickier the second time around and the interest rates are bound to be higher. Still, over 30 percent of home purchases over the last three years have been second homes, so it can certainly be done.
By: Sergio Haros
Posts Tagged ‘Chunk’
How Do Second Mortgage Loans Work?
December 12th, 2009
If you need extra money for home improvements, debt consolidation or even to purchase an additional home then a second mortgage might be exactly what you are looking for to make that happen. However, when you hear the term second mortgage you might not be sure exactly what it means. To put it simply it is just another mortgage on your existing home. Basically you are borrowing money for one or more reasons and using your home as collateral.
The term “second” means that the loan you are taking out does not have priority on your home if for some reason you can’t pay it back on time. In all cases the initial mortgage on your home would be paid before any money would go toward a second mortgage payment. With that being said, the next question is why in the world someone would put their home up as collateral for money. Well, the answer is that you shouldn’t unless you are in a situation where you need a large amount of money fast.
Western Vista Federal Credit Union in Wyoming notes that a “second mortgage is what it says – the second loan against a specific piece of property. Consider this example: Let’s say you have a first mortgage on your home. The value is $100,000 and you have a $60,000 balance left to pay on your loan. The $40,000 difference is considered equity, or the part of the home that you own outright. If you wish to further borrow against that $40,000, you would be taking out a second mortgage on the home in order to do so. Why borrow against this equity? In many cases, the interest rate you pay on your mortgage is lower than many other types of loans. Interest is also frequently tax deductible for a first or second mortgage, but not necessarily for a car loan or a credit card.”
When a person borrows money against their home that’s a large chunk of change being used for collateral and it also allows the borrower to get a bigger loan. There are some disadvantages to second mortgages such as the fact that you are taking a chance with your home should something happen and you have trouble paying the second mortgage back.
Take a look at the interest rate on a second mortgage too. You can probably expect the rate to be a bit higher because it is riskier to the lender who knows that if a default occurs the primary mortgage gets paid first and then the second mortgage. You can also be choosy about a second mortgage so check more than one source when trying to make a decision. Watch out too for balloon payments, which is a payment that starts out low and rises as time goes by. If possible, choose a fixed interest rate. Also be aware that second mortgages, like any other loans, have additional closing costs. There are the appraisal fees, application costs and other closing costs that can be as random as title searches.
At the Mortgage101 they say, “Many companies will charge a fee for lending you money. The fee is usually a percentage of the loan and is sometimes referred to as “points.” One point is equal to one percent of the amount you borrow. For example, if you were to borrow $10,000 with a fee of eight points, you would pay $800 in “points.” The number of point’s mortgage companies charge varies, so it may be worthwhile to shop around.”
You also want to make sure you get a second loan that allows you to keep your first mortgage.
In the long run second mortgages are a good bet for home improvement financing and some second mortgages can even be extended for up to 20 years. Remember though, it’s not only home equity lines of credit that don’t outline the amount of the monthly payments so read your contract. There are many second mortgage loans that don’t either. Joe Prussack notes, “Everybody loves low monthly payments… These popular 2nds’ (second mortgages) also usually have adjustable rates so these loans aren’t for the faint hearted.” In this case, if you are one of the fainthearted then stick with a fixed interest rate versus one of the variable interest rate loans. This way you will know exactly what payments are expected each month be it for a second mortgage or another type of loan in order to secure a big ticket item that you have needed for the past few years.
By: Rita Cook