A second mortgage is generally offered on the equity of the primary loan. This loan as the name suggests is a subordinate loan or the junior lien. A property can have several loans against it. But if the borrower is facing any kind of financial crisis and the property is at a risk of foreclosure or actually goes through a foreclosure sale, the junior lien is often written off. For any kind of settlement situations, like a shortsale or an actual foreclosure sale, the second mortgage is written off as the primary mortgage has to be paid off first. For this reason, a second mortgage is at a higher risk for lenders.
These loans usually have a higher interest rate due to the high risk involved. A borrower can avail of a second mortgage if he wants to do any kind of renovation on the house.
At times the second lien can actually serve as a catalyst in causing a foreclosure on the primary mortgage. If the borrower defaults on the secondary mortgage the lender can buy out the primary mortgage and risk foreclosure to the property.
A borrower’s credit score is pulled when a second mortgage is issued also the debt-to-income ratio is considered and to qualify for a second mortgage it should be less. When you need finances you can take a second mortgage but you also have to realize that when you borrow against the equity of your home, you put your house at risk, because if you are facing a financial crisis then you may already have difficulty in paying one loan and the second mortgage means one more payment. Failure to pay off this loan can lead to foreclosure of the property.
People typically use second mortgages for home renovation, debt consolidation, to purchase a second home or to create a home equity line of credit. If you are using your funds wisely and have a definite financial plan to work things out, this kind of loan can be great. You can use it as an investment or use it to redo your house, but if you borrow to pay off excessive bills, remember you are putting your house at risk. If not paid on time this loan can cause the risk of foreclosure to your house.
Second mortgages also come with a higher rate of interest as they are high risk loans for the lender because in case you default on your primary loan then the property is sold off and first the primary loan is paid off and then the secondary.
A second mortgage is a safer option than a credit card or various other kinds of loans as most credit cards charge a very high rate of interest and once you default your credit goes for a toss. Whereas when you borrow against the equity of your home you can borrow larger sums of money and as compared to a credit card or other kinds of loans the interest rate is much lower. The lenders also have lot of workout plans if you default. They are not in a hurry to foreclose as foreclosures actually causes heavy losses to them as well.
Wednesday, November 18, 2009
Can you afford to not pay the second mortgage?
Several borrowers have a primary and secondary mortgage against their home. Now this as such is not a disqualification of any kind but when faced with a financial problem the two loans together can prove to be quite a nightmare. You might even consider not paying the second mortgage and wonder what is the worst they can do?
Nothing at a surface level but if you stop paying the second mortgage and the lender can’t threaten foreclosure because if the property is foreclosed upon everything will go towards the first loan and the lender will lose money, then also the debt remains, don’t assume that just because the lender can’t take any action you can afford not to pay.
In the earlier market scenario second mortgages were commonplace. Most people had a second mortgage against the first mortgage, but with the housing market going down and recession hitting the mortgage industry the worst, second mortgages are becoming less popular with the lenders. The lender often loses money when the borrower decides to default.
Earlier second mortgages were used to compensate for borrowers who could not make the initial down payment. So the second mortgage compensated for the twenty percent down payment.
It’s a well known fact that in the event there is a foreclosure on the account, the money recovered goes towards paying the first mortgage and usually this sum is less than the property value, for this reason the secondary mortgage lender often tends to end up with no money in his hand and is at a greater loss, but, for this very reason these mortgages have a higher rate of interest.
If you are decide not to pay the second mortgage because you feel, what can the lender do, the answer is a lot!
In the first place, you aren’t closing the possibility of foreclosure just deferring it. They may not be able to foreclose at the present moment but once either the housing market goes up or you have paid part of the primary mortgage, so that the house has some equity the second mortgage holder can be back with his threat of foreclosure or they can actually foreclose on your house.
Besides the fact that the threat of foreclosure is always looming large over your head, not paying a second mortgage will show up against your credit and a willful defaulter is not viewed as a great borrower.
Another thing is if you decide to default on your second mortgage you will accumulate late fees and charges which will further add up to the payment. In the event there is a foreclosure or a notice is issued to you, all this will be added to your payment. You will also start facing harassment from collection agencies and your reputation in your neighborhood will go for a toss.
There is also a possibility of the secondary mortgage lender purchasing the loan from the primary mortgage lender and then he might foreclose on you. Alternately if the primary lender comes to know you are defaulting on the second mortgage then he may decide to foreclose on you considering the fact that you might do the same with the primary mortgage or purchase the second mortgage from the secondary lender.
So it is advisable to always pay your loan and if you are facing a financial crunch inform your lender and in all events work with your lender.
Nothing at a surface level but if you stop paying the second mortgage and the lender can’t threaten foreclosure because if the property is foreclosed upon everything will go towards the first loan and the lender will lose money, then also the debt remains, don’t assume that just because the lender can’t take any action you can afford not to pay.
In the earlier market scenario second mortgages were commonplace. Most people had a second mortgage against the first mortgage, but with the housing market going down and recession hitting the mortgage industry the worst, second mortgages are becoming less popular with the lenders. The lender often loses money when the borrower decides to default.
Earlier second mortgages were used to compensate for borrowers who could not make the initial down payment. So the second mortgage compensated for the twenty percent down payment.
It’s a well known fact that in the event there is a foreclosure on the account, the money recovered goes towards paying the first mortgage and usually this sum is less than the property value, for this reason the secondary mortgage lender often tends to end up with no money in his hand and is at a greater loss, but, for this very reason these mortgages have a higher rate of interest.
If you are decide not to pay the second mortgage because you feel, what can the lender do, the answer is a lot!
In the first place, you aren’t closing the possibility of foreclosure just deferring it. They may not be able to foreclose at the present moment but once either the housing market goes up or you have paid part of the primary mortgage, so that the house has some equity the second mortgage holder can be back with his threat of foreclosure or they can actually foreclose on your house.
Besides the fact that the threat of foreclosure is always looming large over your head, not paying a second mortgage will show up against your credit and a willful defaulter is not viewed as a great borrower.
Another thing is if you decide to default on your second mortgage you will accumulate late fees and charges which will further add up to the payment. In the event there is a foreclosure or a notice is issued to you, all this will be added to your payment. You will also start facing harassment from collection agencies and your reputation in your neighborhood will go for a toss.
There is also a possibility of the secondary mortgage lender purchasing the loan from the primary mortgage lender and then he might foreclose on you. Alternately if the primary lender comes to know you are defaulting on the second mortgage then he may decide to foreclose on you considering the fact that you might do the same with the primary mortgage or purchase the second mortgage from the secondary lender.
So it is advisable to always pay your loan and if you are facing a financial crunch inform your lender and in all events work with your lender.
Second mortgage terms and conditions
Typically a second mortgage is issued on the equity of the first mortgage and for this reason most of its terms are similar to that of the first mortgage. Most people avail of these loans to cover up for additional expenses, like renovation of the home, to buy another house or to pay pending bills.
These loans are better than other kinds of loans available in the market as you have a longer term to repay the loan. You get larger sums of money as they are issued on the equity of your home and the terms of repayment are flexible. If you default, the lender tries to work out a payment plan with you so that you can catch up.
Real estate property value like bullion usually continues to appreciate even when the property is under mortgage, the borrower has the option of utilizing this equity by taking a second or third mortgage against the property.
Second mortgage as is evident from the name means that it has a secondary status. A second mortgage can exist only if there is a primary mortgage. Generally the terms of the junior lien or the subordinate loan are so designed that they are in sync with the terms of the primary mortgage, which in a way means that if a borrower has a loan of $95,000 on the first mortgage and has a repayment term of 30 years than the secondary loan will not go beyond this period which means that the second mortgage will not be for a larger amount than the primary and will not have a repayment term longer than the primary.
Similar to the primary mortgage, repayment of second mortgage is also in equal monthly instalments which are divided into principal and interest.
Due the risky nature of the junior lien it has a higher rate of interest but it is still lower than other loans available in the market. Another reason why these kinds of loans are preferred is that you pay in equal monthly instalments and due to the long repayment term, the payment amount is much more affordable.
The nature of these loans is such that for a period they allow you to just pay the interest and later the principal. The best part is if you are facing a financial crunch, you can speak with your lender about deferring payments, the lender even works out a payment plan with you if you have defaulted on the loan. So in several ways these loans are a safer alternative to a credit card loan or other kinds of loans.
If you want to buy a new house or property, you will need to have some kind of equity; a secondary mortgage provides you with that much needed equity which you can use towards acquisition of that new property. One clause is that the borrower must have the capability to repay two loans.
The second mortgage may be obtained from the primary mortgage lender or another lender; however the second mortgage should be worked out with the primary mortgage lender’s knowledge.
These loans are better than other kinds of loans available in the market as you have a longer term to repay the loan. You get larger sums of money as they are issued on the equity of your home and the terms of repayment are flexible. If you default, the lender tries to work out a payment plan with you so that you can catch up.
Real estate property value like bullion usually continues to appreciate even when the property is under mortgage, the borrower has the option of utilizing this equity by taking a second or third mortgage against the property.
Second mortgage as is evident from the name means that it has a secondary status. A second mortgage can exist only if there is a primary mortgage. Generally the terms of the junior lien or the subordinate loan are so designed that they are in sync with the terms of the primary mortgage, which in a way means that if a borrower has a loan of $95,000 on the first mortgage and has a repayment term of 30 years than the secondary loan will not go beyond this period which means that the second mortgage will not be for a larger amount than the primary and will not have a repayment term longer than the primary.
Similar to the primary mortgage, repayment of second mortgage is also in equal monthly instalments which are divided into principal and interest.
Due the risky nature of the junior lien it has a higher rate of interest but it is still lower than other loans available in the market. Another reason why these kinds of loans are preferred is that you pay in equal monthly instalments and due to the long repayment term, the payment amount is much more affordable.
The nature of these loans is such that for a period they allow you to just pay the interest and later the principal. The best part is if you are facing a financial crunch, you can speak with your lender about deferring payments, the lender even works out a payment plan with you if you have defaulted on the loan. So in several ways these loans are a safer alternative to a credit card loan or other kinds of loans.
If you want to buy a new house or property, you will need to have some kind of equity; a secondary mortgage provides you with that much needed equity which you can use towards acquisition of that new property. One clause is that the borrower must have the capability to repay two loans.
The second mortgage may be obtained from the primary mortgage lender or another lender; however the second mortgage should be worked out with the primary mortgage lender’s knowledge.
Common mistakes to avoid with second mortgages
Maintaining and understanding the terms of the second mortgage would be easy for most borrowers as they already have a primary mortgage and they know how the terms work. However there are some loopholes that you must watch out for. Please keep these ten common mistakes so that the second mortgage does not leave a bitter taste in your mouth.
1. Make sure you have a clear knowledge of Helocs and home equity loans. While home equity loans are often fixed rate mortgages, Helocs are adjustable rate mortgages or ARMS. Home equity loans allows you to avail of the loan with a single down payment, Helocs on the other hand offer the option of credit line, where you can get a payment advance till you don’t exceed your credit line. The purpose of both is also different; with home equity loans you can do a home improvement or consolidate existing debts conversely with Helocs you can meet your periodic financial needs.
2. Do not take a large credit line. This may initially look very attractive but in the long term it could prove to work against you. This credit line is considered when you are opting for other loans and this may result in your getting rejected for the loan. Generally your credit line payments are based on your gross credit liability. Even if you have no outstanding balance on your credit line, having a large credit line automatically means that you have to make huge payments and this may adversely affect your ability to pay any other loan.
3. Settling for the first mortgage lender means you have not carefully checked all your options. You could opt for a loan with your primary lender or even your bank, but if you want to save money, check all the lenders to get the lowest possible interest and the best terms and conditions.
4. Ask for a good faith estimate from your lender so you know in advance what you are paying for, you should not suddenly have additional charges later on.
5. Don’t assume that the second mortgage will be cheaper, do a careful calculation to check out your options.
6. Do not opt for a refinance if you have a second mortgage unless you wish to ask the new lender for subordination, otherwise the second loan will be consolidated with the first when you refinance.
7. Check out if the second mortgage is fully tax deductible. This information should not be expected from the lender; rather it should be actively sought from a tax consultant.
8. If you have opted for a Heloc to pay off credit card bills make sure you have not completely exhausted the credit line or else you may not be able to repay this loan.
9. Most loans have a prepayment penalty associated with the loan, please make sure you have checked this otherwise if you plan to refinance you may have to pay additionally or may not be able to refinance immediately.
10. Often second mortgages have life caps, if you are unaware of this when you obtain a loan then you may not be ready for increased payments.
1. Make sure you have a clear knowledge of Helocs and home equity loans. While home equity loans are often fixed rate mortgages, Helocs are adjustable rate mortgages or ARMS. Home equity loans allows you to avail of the loan with a single down payment, Helocs on the other hand offer the option of credit line, where you can get a payment advance till you don’t exceed your credit line. The purpose of both is also different; with home equity loans you can do a home improvement or consolidate existing debts conversely with Helocs you can meet your periodic financial needs.
2. Do not take a large credit line. This may initially look very attractive but in the long term it could prove to work against you. This credit line is considered when you are opting for other loans and this may result in your getting rejected for the loan. Generally your credit line payments are based on your gross credit liability. Even if you have no outstanding balance on your credit line, having a large credit line automatically means that you have to make huge payments and this may adversely affect your ability to pay any other loan.
3. Settling for the first mortgage lender means you have not carefully checked all your options. You could opt for a loan with your primary lender or even your bank, but if you want to save money, check all the lenders to get the lowest possible interest and the best terms and conditions.
4. Ask for a good faith estimate from your lender so you know in advance what you are paying for, you should not suddenly have additional charges later on.
5. Don’t assume that the second mortgage will be cheaper, do a careful calculation to check out your options.
6. Do not opt for a refinance if you have a second mortgage unless you wish to ask the new lender for subordination, otherwise the second loan will be consolidated with the first when you refinance.
7. Check out if the second mortgage is fully tax deductible. This information should not be expected from the lender; rather it should be actively sought from a tax consultant.
8. If you have opted for a Heloc to pay off credit card bills make sure you have not completely exhausted the credit line or else you may not be able to repay this loan.
9. Most loans have a prepayment penalty associated with the loan, please make sure you have checked this otherwise if you plan to refinance you may have to pay additionally or may not be able to refinance immediately.
10. Often second mortgages have life caps, if you are unaware of this when you obtain a loan then you may not be ready for increased payments.
Can a second mortgage be a long term financing option?
A smart financing option is to use your home equity for other purposes. You can do so by obtaining a second mortgage. These loans are good for any additional expenditure you may incur, such as a home improvement plan, pending bills or debt consolidation or any other financial investment.
A home equity loan is a fixed rate mortgage that is offered against your home equity. In essence your home equity works as collateral here. One advantage of this loan is that as it is a fixed rate mortgage you do not have any surprise payments springing up on you. The payment is fixed through the life of the loan so you can easily plan your budget. Equity loans occasionally also have variable rates.
To qualify for a second mortgage you need to meet three criteria:
1. Credit rating: You need a good credit history and a good credit rating to be eligible for a second mortgage. If you have a bad credit you may have difficulty in obtaining a home equity loan.
2. Debt-to income ratio: this is a very important criterion when obtaining a secondary mortgage. Lenders typically expect this ratio to be low when issuing an equity loan.
3. LTV or loan to value ratio: Lenders typically like to keep the loan to value ratio below 80% of the house value, so they check the balance of the primary mortgage when issuing a second mortgage.
An important point to bear in mind is that home equity loans typically have a higher interest rate than primary mortgages because of the high risk involved for the lender. These however are still cheaper than credit card loans and have a lot less hassle involved than a credit card. The repayment term can be anywhere from 10 to 30 years. So you have a longer repayment time. Instalments are fixed and if you default or are faced with a financial crunch, the lender will help you out with a payment plan. This loan thus works more to your advantage than a credit card loan.
You can use this loan as an investment that is if you intend to purchase another house than you could make the initial down payment with this loan. When you seek a home loan the lender typically finances 80% of the home value and you are expected to pay the 20%, this is known as the LTV ratio and you can use your existing home equity to pay for the new home. This could be an investment but you should be sure that you are capable of paying 3 loans at the same time.
If you want to know how much you can borrow with the second mortgage, then make sure that the combined ratio of your primary and secondary mortgage should not exceed 80% of the home value.
Your home equity at any time is calculated by the current appraised value of your home minus the amount you owe on the mortgage. Typically the lenders keep the LTV below or equal to 80% otherwise you have to obtain a PMI or private mortgage insurance.
A home equity loan is a fixed rate mortgage that is offered against your home equity. In essence your home equity works as collateral here. One advantage of this loan is that as it is a fixed rate mortgage you do not have any surprise payments springing up on you. The payment is fixed through the life of the loan so you can easily plan your budget. Equity loans occasionally also have variable rates.
To qualify for a second mortgage you need to meet three criteria:
1. Credit rating: You need a good credit history and a good credit rating to be eligible for a second mortgage. If you have a bad credit you may have difficulty in obtaining a home equity loan.
2. Debt-to income ratio: this is a very important criterion when obtaining a secondary mortgage. Lenders typically expect this ratio to be low when issuing an equity loan.
3. LTV or loan to value ratio: Lenders typically like to keep the loan to value ratio below 80% of the house value, so they check the balance of the primary mortgage when issuing a second mortgage.
An important point to bear in mind is that home equity loans typically have a higher interest rate than primary mortgages because of the high risk involved for the lender. These however are still cheaper than credit card loans and have a lot less hassle involved than a credit card. The repayment term can be anywhere from 10 to 30 years. So you have a longer repayment time. Instalments are fixed and if you default or are faced with a financial crunch, the lender will help you out with a payment plan. This loan thus works more to your advantage than a credit card loan.
You can use this loan as an investment that is if you intend to purchase another house than you could make the initial down payment with this loan. When you seek a home loan the lender typically finances 80% of the home value and you are expected to pay the 20%, this is known as the LTV ratio and you can use your existing home equity to pay for the new home. This could be an investment but you should be sure that you are capable of paying 3 loans at the same time.
If you want to know how much you can borrow with the second mortgage, then make sure that the combined ratio of your primary and secondary mortgage should not exceed 80% of the home value.
Your home equity at any time is calculated by the current appraised value of your home minus the amount you owe on the mortgage. Typically the lenders keep the LTV below or equal to 80% otherwise you have to obtain a PMI or private mortgage insurance.
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