How to Understand Second Mortgages
There are two types of standard mortgages on a home: a first mortgage and a second mortgage. The first mortgage is the original mortgage that is obtained to construct or buy the home. The second mortgage is taken out some time later, for a different purpose.
Usually, homeowners will take out a second mortgage to undertake some renovations or improvements to the property, but increasingly, people are using the equity in their homes to reduce or eliminate their high rate credit card debt.
If you are thinking about taking out a second mortgage for home improvements, you should be sure you are going to get that additional value. Adding a bedroom, or renovating a kitchen are projects that have proven to make a home more valuable since these are items that new home buyers look for.
Taking out a second mortgage to install an in ground pool may not be the best use for the funds, since a luxury item like this may not necessarily add to the value of a home.
Today, it is considered a smart financial move to reduce or eliminate high consumer debt and replace it with lower rate debt taken from the elevated value of the home. Typically the interest rate on credit cards can be 16 to 20% or more, whereas a second mortgage can be obtained at 5-9%, representing a substantial overall savings to the homeowner.
Make sure, however, that the cost of the new debt is balanced by the benefit received. Either the value of the home should improve to an extent that makes the loan cost worthwhile, or the savings from your credit cards should balance the cost of the loan.
Since a first mortgage is paid off from the proceeds of the home in case of default, there may not be enough equity in the home to pay the second mortgage, and this is the risk the second mortgage lender takes.
Therefore, second mortgages will have a higher interest rate than first mortgages. The bank granting the second mortgage will have a higher risk that the loan will not be paid, and increased risk is one of the most important factors in interest rates.
There are closing costs with second mortgages just as there are with first mortgages. Make sure you are fully aware of all of the closing costs you will have to pay for loan, so that you can be sure the total cost of the loan balances the increased value of the home or the savings on the credit cards!
Rates on second mortgages can vary greatly, so it really pays to shop around, not only for the base rate, but also for the lowest package of closing costs. Since the loan amount of a second mortgage is typically not as much as a first mortgage, small differences in rates and costs can have a proportionately higher effect on the cost of the loan.
Usually, homeowners will take out a second mortgage to undertake some renovations or improvements to the property, but increasingly, people are using the equity in their homes to reduce or eliminate their high rate credit card debt.
If you are thinking about taking out a second mortgage for home improvements, you should be sure you are going to get that additional value. Adding a bedroom, or renovating a kitchen are projects that have proven to make a home more valuable since these are items that new home buyers look for.
Taking out a second mortgage to install an in ground pool may not be the best use for the funds, since a luxury item like this may not necessarily add to the value of a home.
Today, it is considered a smart financial move to reduce or eliminate high consumer debt and replace it with lower rate debt taken from the elevated value of the home. Typically the interest rate on credit cards can be 16 to 20% or more, whereas a second mortgage can be obtained at 5-9%, representing a substantial overall savings to the homeowner.
Make sure, however, that the cost of the new debt is balanced by the benefit received. Either the value of the home should improve to an extent that makes the loan cost worthwhile, or the savings from your credit cards should balance the cost of the loan.
Since a first mortgage is paid off from the proceeds of the home in case of default, there may not be enough equity in the home to pay the second mortgage, and this is the risk the second mortgage lender takes.
Therefore, second mortgages will have a higher interest rate than first mortgages. The bank granting the second mortgage will have a higher risk that the loan will not be paid, and increased risk is one of the most important factors in interest rates.
There are closing costs with second mortgages just as there are with first mortgages. Make sure you are fully aware of all of the closing costs you will have to pay for loan, so that you can be sure the total cost of the loan balances the increased value of the home or the savings on the credit cards!
Rates on second mortgages can vary greatly, so it really pays to shop around, not only for the base rate, but also for the lowest package of closing costs. Since the loan amount of a second mortgage is typically not as much as a first mortgage, small differences in rates and costs can have a proportionately higher effect on the cost of the loan.
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