Simply put, a second mortgage is a loan that allows you to borrow against the value of your current house or other properties you may own. Your property is an asset that gains value over time and second mortgages, ideally known as home equity lines of credit, are a means to utilize that asset for other things without the need to sell your property.
A second mortgage works differently compared to the initial, or primary mortgage. The second mortgage acts as a line for credit because the money in the loan is drawn from the equity in your house or property.
If you are already repaying the initial mortgage on your house, a second one involves applying for another loan with the same house as security.
Second mortgages are ranked behind the initial ones, and that means if you default on your debt and your house is sold, the first mortgage will be reimbursed before the second. That is the primary reason why HELOCs/second mortgages are generally more arduous to get than conventional mortgages.
Let us assume that you have a mortgage of $400,000 secured on your home with lender A and decide to apply for a second loan of $400,000 on the same property with lender B. If you fail to pay both of the mortgages and your home is sold for $600,000, lender A would be paid in full but lender B would only get the remaining amount.
Also, bear in mind that when it comes to applying and qualifying for a second mortgage, it’s mandatory to seek the permission of the existing lender.
For most people, refinancing their existing home loan with another lending institution is less risky as it gives them access to a higher amount. However, in some cases, securing a second mortgage can be advantageous.
For instance, if you wish to access some of the equity in your property but your lender has denied the request for a higher amount, a HELOC can be a good option. This could ideally be the case if your initial loan is a fixed rate mortgage. You will not only have to worry about the costly exit fees when you refinance, but the fixed rate may be considerably better than the current variable rate.
Another reason to apply for a second mortgage is to purchase another property. Conventional banks often require 20% down payment for the purchase of an additional property. And so, if you want to quickly fund the down payment, it is possible to borrow against the property you already down. Using leverage or borrowed money is best when purchasing assets.
You can also take a second mortgage for investment purposes. Sometimes, it takes money to make money and securing a second mortgage can help improve your investment portfolio.
If you want to change your career, or are stuck in a dead-end job, a second mortgage, if you are able to meet the monthly payments can help you go back to school. It can ideally be used to help pay your children’s education. As going back to school can potentially get you a better job, it is certainly a great investment.
Lastly, you can use a second mortgage for home renovations. If your roof is leaking, or you want a new kitchen or bathroom, taking out a loan for the tasks can be daunting as they call for a lot of money. However, a second mortgage enables to access your property’s equity and get the work done.
Most lenders in Australia tend to be reluctant in giving second mortgages and that’s because they present a slightly high-risk borrowing alternative and also because there is a lower priority placed on them. As mentioned earlier, if you default on your initial home loan, only when the first home loan will be repaid before the second one is attended to.
As such, most of the lenders will simply refuse to offer a second mortgage or put tight limits on the amount you can access. However, there are several lenders that can assist you if you want a HELOC. All you need is to do your homework.
If you wish to secure a second mortgage, you will need to get an approval from your initial lender. Typically, you need to pay a fee to get the initial lender to assess your request.
If you decide to take the second loan with the same lender, you can be able to borrow up to 95 percent loan to valuation ratio. If you go with a different one, you can get up to 85 percent loan to valuation ratio.
Homeowners apply for a second mortgage for an array of reasons as mentioned above. Here are some of the benefits that you can enjoy from taking a second mortgage:
Gaining access to your property’s equity simply means that you can be able to consolidate and pay down your debts.
A HELOC ideally lets you access the equity in your property which helps in freeing up your cash flow.
The ability to access your home equity can also help you make the much-needed repairs and renovations. This can also help increase the value of your home.
A HELOC also gives a substitute for refinancing which can involve exit fees, break costs etc.
If you’re becoming a guarantor for a friend or family member, then you can apply for a second mortgage as security for the lending institution.
Applying for a second mortgage is not something you should take lightly. It is imperative to go through the same considerations with the initial mortgage as it is just as serious of an undertaking. Ideally, it is important to know that second mortgages generally come with a higher interest rate and so, you will need to ascertain that you will be able to afford the extra repayments.
To get a better picture of the extra expense, it is advisable to avail a mortgage calculator to estimate your repayments. This will help you see if they will be manageable in comparison to your current budget and income. As with any other home loan, it is also imperative to consider the fees and rates related to the mortgage and the terms being offered by the lending institution as well.
Doing your homework is crucial when availing these loans.
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