Second Mortgages
Under what conditions should you take out a second mortgage? Obviously, when a borrower takes out a second mortgage, there is a higher risk of default since a larger amount of money is being borrowed. The less money the borrower utilizes as a down payment, the more likely defaulting is. This is something you definitely want to avoid. You should only take out a second mortgage if you are 100% confident that you will not default.
If you are unable to put the magic 20% down on your home, a second loan may be beneficial. Let’s assume that you can only pay 10% on a down payment. Your first mortgage will cover 80% of the cost, while the second loan covers the remaining 10%. This may allow you to avoid paying mortgage insurance on the first mortgage, depending on the lender’s policies. Some lenders will even allow you to have the entire 100% of the loan covered between the two mortgages, say for example 80/20. This requires virtually no down payment. These types of loans are not available through Fannie Mae or Freddie Mac and require impeccable credit ratings. They also have a slightly higher interest rate than a normal mortgage would have.
Most lenders do not frown upon second mortgages. In fact, this is an additional way for them to make money, so they are often welcomed. Federal loan agencies, however, have realized that borrowers of second mortgages are at a higher risk for defaulting, so they have increased industry guidelines for second mortgages.
It must be remembered that since second mortgages are higher risks, the interest rates for them are higher. They also require a quicker payoff time period. Usually, the interest rate will be 1 to 5% higher than the first loan, and must be paid off in 3 to 15 years.
In the unfortunate occurrence of defaulting, the first mortgage is foreclosed first. Assets will go towards paying off this first loan. The second loan will be covered if there is anything left after this.
For more infomation on Mortgages choose from the list below. |
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