A second mortgage loan can seem quite tempting, but it is very important to understand that it is also quite risky. A second mortgage loan can put you at greater risk upon default than your first mortgage.
How a second mortgage loan works is that it is second behind the first mortgage. If you default on your second mortgage, no matter the status of your first mortgage, you can still lose your home. What will happen is the lender will pay off the first mortgage so they can then seize your home.
It is a huge risk because you will lose your home and have to pay off the two mortgages. A second mortgage loan can put you in financial troubles that could ruin your credit and financial stability. That is why you must understand the risks.
Penalties to Think About
Default penalties – This penalty is charged if you are late or miss a payment. One missed payment could rack up some huge penalties that could make it very difficult for you to get back on track. Avoid a second mortgage loan with this penalty.
Prepayment penalty – While it may seem silly, lenders do charge you fees for paying off your loan early. That is because they are losing out on all the interest you would have paid if you had paid out the whole length of the loan. You can avoid these, though.
These two penalties are something to consider. Both can really mess up your plans to pay off your second mortgage loan and could put you at risk of default. Watch out for the penalties and avoid them if possible.
Know the Costs
You may find a loan with great terms and rates, but you also need to remember the costs associated with actually getting the loan. You will need to pay:
- appraisal fees
- application fee
- closing costs
Make sure these costs won’t put you in a bad financial situation. You do not want to end up late on your first loan payment.
The Risk
When you are considering a second mortgage loan you have to make sure you can afford it and that goes well beyond being able to afford the monthly payment. If your budget is tight you can afford to have surprises come up that require extra money.
Overall, you really just have to make sure a second loan fits into your budget. If you are smart about it and figure in all the costs and possibilities then you should be able to get a second mortgage loan without any fear of losing your home.
Shopping around is the best way to get a good deal on a second mortgage home loan. You should always check out multiple lenders to see what types of deals you can get. You should also make sure that you will be getting the best rates and terms.
A second mortgage home loan can be a great way to get some extra money, but you can also risk getting stuck paying associated costs and fees that could make that extra money a waste of time. When you shop around, though, you can successfully find a second mortgage home loan that works for you.
Know What Lenders Want
Second mortgages are more risky for a lender than a first mortgage. The reason is that the second mortgage holder can only go after the home if the first mortgage is paid by them. Therefore if a homeowner defaults in their second mortgage, the lender has to pay off the first loan in order to seize the home for payment.
For this reason, lenders will really want to make sure that you are a reliable person and that you can pay back the loan. They will look at:
- the equity in your home
- your income
- your credit
- your employment history
Understand the Fees and Costs
With a second mortgage home loan you will be charged traditional costs for a mortgage, like appraisal fees, application fees and closing costs. You will also want to find out about the following fees and costs:
- Penalties
- APR
- Insurance policies included
Make sure you get all the details on every penalty and fee because with second mortgage loans it is the trend to incorporate quite a few different extra costs into the loan.
Know Risks and How to Minimize Them
The major risk of a second mortgage is that you could lose your home. The best way to minimize the risks is to make sure you can afford the loan. Go through all the terms and fees of the loan so that you can make sure it is affordable. If you have any problems paying your bills and you are not using the loan to fix those problems, then you should avoid getting yourself into any more debt and seek another alternative instead.
Understanding what lenders look for, the fees and costs and the risks of a second mortgage home loan will allow you to be ready to shop around with different lenders. You can put your best efforts into finding a second mortgage that is going to help you and not hurt you. In the end, you will get the most benefit from shopping around when you are prepared for it.
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