The Second Mortgage - What Are The Risks?

If you are in need of money for home improvement, tuition or to consolidate debts but you don't own a credit card or keep a savings account, a second mortgage can be a good option. This type of loan is secured by your property and creates a second lien on your home. You will need sufficient equity and acceptable credit to qualify and be able to repay the money loaned to you. It is similar to a first mortgage loan in terms of application and processing.

Second mortgages can be classified into two types. A traditional second mortgage or home equity loan enables you to acquire a one-time lump sum of cash which is ideal if you need immediate cash to meet large expenses. Another type is available as line of credit and is similar to a credit card where you can withdraw the funds whenever you need them. Typical withdraw period for this is 10 years. These options offered by lending companies are beneficial to borrowers who are in need of quick cash. As a lot of people are not fortunate enough to have sizable savings accounts which they can tap into in case of emergencies, second mortgages give them access to cash by accessing their equity without the hassle of selling their properties.

Although second mortgages are useful, they can also be risky. Since this loan creates a second lien to your property, defaulting on this can lead to foreclosure, even if you have paid your first mortgage loan on time. The second loan may also carry higher interest rates thus increasing your monthly payments. There are also mortgage-related fees that you need to pay and depending on your lender, you may also be charged some appraisal and closing costs.

Before considering this type of loan, you may want to determine first if you really need a second mortgage. Do not go for it if you only need money to spend. In case you decide to opt for it, get your house appraised to determine its market value because the amount of your loan will depend on the equity on the house. You should also look for the best rates available by asking free quotes from different lenders. This way, you can compare and choose the best rate. Second, you will also need to calculate your monthly payments for both first and second loans to see if you can afford them because you would not want to fall behind your on payments and end up risking your house. Finally, you should check the loan terms, penalties and costs. You need to understand what you are signing to and if you need to pay for additional processing fees or closing costs. Some companies have pre-payment penalties for a second mortgage, too. Once you understand the loan terms, commit the loan and proceed with it.

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