How Does a Second Mortgage Differ from a First
Mortgage?
By Mike Cotter
A second mortgage is basically a loan that you take
against the equity that you have already built into your
home. The proceeds from the second mortgage can
generally be used for whatever purpose the borrower
has in mind. It can be used to pay off a car loan or
credit cards. The proceeds can be used for home
improvement or to take a vacation. The money can even
be put in a savings account for a rainy day fund.
A second mortgage is basically a loan that you take
against the equity that you have already built into your
home. The proceeds from the second mortgage can
generally be used for whatever purpose the borrower
has in mind. It can be used to pay off a car loan or
credit cards. The proceeds can be used for home
improvement or to take a vacation. The money can even
be put in a savings account for a rainy day fund.
In the past, the total amount of debt from a first and
second mortgage combined could not be more than 80%
of the home's appraised value. Recently however, low
interest rates and a hyper-competitive marketplace
created a lending environment where some lenders were
approving second mortgages that, when combined with
the first mortgage balance, totaled as high as 125% of
the home's appraised value.
However, financial advisors will tell you that carrying that
much debt on your home is never a good idea. I never
recommend borrowing more than 100% of the value of
your home and I rarely recommend a second mortgage
with a loan to value of greater than 90%.
A second mortgage is always subordinate to the first
mortgage. This means that in the event of a default, the
property is sold and the proceeds are used to pay the
first mortgage first, including any legal costs and other
costs of the sale. The remaining proceeds are applied to
the second mortgage. If there is not enough money
remaining from the sale of the home, the second
mortgage does not get paid.
A Higher Interest Rate for Second Mortgages
Before a lender is willing to loan money out for a home
mortgage, he looks at the risk level to him to determine
the interest rate to charge. That is why a high risk
borrower with a poor credit history gets charged a
higher interest rate compared to a low risk borrower with
a strong credit history.
The same theory holds true with a second mortgage.
Because the lender of the second mortgage is second
to be paid off in the event of a default, and because
there is a greater chance that there might not be enough
equity in the home to pay off the second mortgage in
full, second mortgages are usually given at a higher
interest rate than are first mortgages; irregardless of who
the borrower is.
Second Mortgage Terms
In general, the terms given for second mortgages are
shorter than those for first mortgages - primarily because
the dollar amount of the second is generally much lower
than that of the first.
Second mortgage repayment terms can vary
considerably, so it is important that you look around for
the one that is best for you. For the most part they
range in length from 5 to 20 years, with the majority of
second mortgage loans being 10 to 15 years. A select
number of lenders will offer a 30 year amortization and
some of them will balloon (set a maturity date) of 15
years. This loan is called a 30 due in 15. Generally, just
like first mortgages, the longer the maturity, the higher
the interest rates. Also, just like first mortgages, the
higher the credit score (FICO) the lower the interest rate.
Types of 2nd Mortgages
Just as the length of the second mortgage can vary, so
can other repayment terms. The majority of second
mortgages are paid back in equal monthly payments with
a portion of the payment going to interest and a portion
to the principal balance, just like a first mortgage.
Second mortgages come in two basic types, fixed rate
and home equity line of credit (HELOC). Fixed rate
mortgages are the standard offering. The HELOC
mortgage is a little unique and has been very popular of
late. Typically this loan calls for interest only payments
for the first 5 to 10 years with the line of credit frozen
at the outstanding balance of the loan. The loan
payments are recast at that point and a standard
principal and interest payment schedule is established for
the remaining 10 to 20 years. HELOC's are typically
priced with a variable interest rate indexed to the New
York City prime interest rate.
HELOC interest rates are similar to other loan pricing;
the lower the FICO score and the higher the loan to
value, the higher the interest rate.
When considering a second home mortgage, be sure to
shop around and then talk to lenders to ensure that you
get the best deal for you!
Contact us for your second mortgage - please fill out
form below or call Suzie 352-213-3424
Mortgage?
By Mike Cotter
A second mortgage is basically a loan that you take
against the equity that you have already built into your
home. The proceeds from the second mortgage can
generally be used for whatever purpose the borrower
has in mind. It can be used to pay off a car loan or
credit cards. The proceeds can be used for home
improvement or to take a vacation. The money can even
be put in a savings account for a rainy day fund.
A second mortgage is basically a loan that you take
against the equity that you have already built into your
home. The proceeds from the second mortgage can
generally be used for whatever purpose the borrower
has in mind. It can be used to pay off a car loan or
credit cards. The proceeds can be used for home
improvement or to take a vacation. The money can even
be put in a savings account for a rainy day fund.
In the past, the total amount of debt from a first and
second mortgage combined could not be more than 80%
of the home's appraised value. Recently however, low
interest rates and a hyper-competitive marketplace
created a lending environment where some lenders were
approving second mortgages that, when combined with
the first mortgage balance, totaled as high as 125% of
the home's appraised value.
However, financial advisors will tell you that carrying that
much debt on your home is never a good idea. I never
recommend borrowing more than 100% of the value of
your home and I rarely recommend a second mortgage
with a loan to value of greater than 90%.
A second mortgage is always subordinate to the first
mortgage. This means that in the event of a default, the
property is sold and the proceeds are used to pay the
first mortgage first, including any legal costs and other
costs of the sale. The remaining proceeds are applied to
the second mortgage. If there is not enough money
remaining from the sale of the home, the second
mortgage does not get paid.
A Higher Interest Rate for Second Mortgages
Before a lender is willing to loan money out for a home
mortgage, he looks at the risk level to him to determine
the interest rate to charge. That is why a high risk
borrower with a poor credit history gets charged a
higher interest rate compared to a low risk borrower with
a strong credit history.
The same theory holds true with a second mortgage.
Because the lender of the second mortgage is second
to be paid off in the event of a default, and because
there is a greater chance that there might not be enough
equity in the home to pay off the second mortgage in
full, second mortgages are usually given at a higher
interest rate than are first mortgages; irregardless of who
the borrower is.
Second Mortgage Terms
In general, the terms given for second mortgages are
shorter than those for first mortgages - primarily because
the dollar amount of the second is generally much lower
than that of the first.
Second mortgage repayment terms can vary
considerably, so it is important that you look around for
the one that is best for you. For the most part they
range in length from 5 to 20 years, with the majority of
second mortgage loans being 10 to 15 years. A select
number of lenders will offer a 30 year amortization and
some of them will balloon (set a maturity date) of 15
years. This loan is called a 30 due in 15. Generally, just
like first mortgages, the longer the maturity, the higher
the interest rates. Also, just like first mortgages, the
higher the credit score (FICO) the lower the interest rate.
Types of 2nd Mortgages
Just as the length of the second mortgage can vary, so
can other repayment terms. The majority of second
mortgages are paid back in equal monthly payments with
a portion of the payment going to interest and a portion
to the principal balance, just like a first mortgage.
Second mortgages come in two basic types, fixed rate
and home equity line of credit (HELOC). Fixed rate
mortgages are the standard offering. The HELOC
mortgage is a little unique and has been very popular of
late. Typically this loan calls for interest only payments
for the first 5 to 10 years with the line of credit frozen
at the outstanding balance of the loan. The loan
payments are recast at that point and a standard
principal and interest payment schedule is established for
the remaining 10 to 20 years. HELOC's are typically
priced with a variable interest rate indexed to the New
York City prime interest rate.
HELOC interest rates are similar to other loan pricing;
the lower the FICO score and the higher the loan to
value, the higher the interest rate.
When considering a second home mortgage, be sure to
shop around and then talk to lenders to ensure that you
get the best deal for you!
Contact us for your second mortgage - please fill out
form below or call Suzie 352-213-3424
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