What to Consider When Taking Out a Second Mortgage

What to Consider When Taking Out a Second Mortgage

A second mortgage, also known as a subordinate mortgage, is the second loan you take against your property. A second mortgage is typically offered with a higher rate of interest in comparison to the rate on the first mortgage. This is because, in the event of a default, the first mortgage is first paid off from the home sale proceeds and the balance is paid towards second mortgage repayment. Here are some things homeowners should consider before going for second mortgages.

Intensity of need

The first thing to be carefully considered when taking a second mortgage is the need for it. Do you really need to take a second mortgage or can you settle with other low-risk financing options? Answer this question by taking into account the purpose of the loan, the amount you need and your repayment capacity. Remember never to borrow more than your property's worth, even though it is tempting to borrow a large sum of money that can be used for practically anything. Interest rates

The next thing to consider is the interest rate on the second mortgage, which is considerably higher than the rate on your first mortgage. Compare the interest rates being offered by various banks and credit unions and go for a lender who offers the most the competitive rate of interest.

Choosing a lender

Ideally, it is wise and convenient to choose the same bank or credit union that you have your first mortgage with because of the possible trustworthy relationship you share with them. However, you should look at other financial institutions if you are not happy with the services of your existing lender/bank or do not want to continue with them for any other reason.

Terms and conditions

Read the terms and conditions very carefully before signing your second mortgage agreement. Some of the banks offer payment options called balloon payments' where your installments are smaller in the beginning and are greatly inflated towards the end of your loan period. Understand the mortgage related terminology clearly so that you don't face any problems during the course of your loan term.

Prepayment and default policies

A lot of banks have unfriendly prepayment policies on second mortgages, which enable them to charge a penalty if you pay off the loan before the specified time period. Check if the second mortgage comes with a prepayment penalty and keep an eye on your repayment track, even if you are prompt in paying your installments, as it is quite possible that you could end up on the defaulter's list because of a clerical error on the bank's front.

Application and insurance costs

Take a close look at the costs associated with taking out such a mortgage and determine whether it is worth the investment. Also check if there are any voluntary insurance policies, which you may not really need, being offered with the second mortgage. If you are not vigilant, you might end up paying more than necessary, resulting in an expensive loan.

Understand how second mortgages work and assess their pros and cons when you decide to tap into your home equity for the second time.

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