What is a second mortgage?

A second mortgage is basically taking out a second loan on top of the existing loan on your home. This loan is secured with the property for collateral. If for example the value of your home is $200 000, but you still owe $140 000 on the loan, then the $60 000 difference is known as your equity. When borrowing against the $60 000, you would then be taking out a second mortgage.

Why take out a second mortgage?

People take out a second mortgage for various reasons. They want to finance home improvements, purchase a second home, consolidate other debt for a lower interest rate, purchase a new car or pay for university tuition. Whatever the reason may be for taking out a second mortgage, first make sure there is a way of recouping the money. It is especially not wise to spend a vast amount of money on a car when it already starts losing value the moment you drive out of the dealership. It makes more sense investing in a business.

Refinance is an option

Before you decide to apply for a second mortgage, first consider refinancing. Firstly, taking out a second mortgage usually implies a higher interest rate. Rather keep your current rate or try and refinance for a lower one. Secondly, sales people get a lot of commission out of second mortgage transaction. Lastly, when choosing to refinance, you keep some equity in your home. And if there is really an emergency you, still have an exit door. But, if the prices of houses fall the value of your house is down, you could end up with negative equity and even more debt.

What to look out for

The interest rate of a second mortgage tends to be higher than the primary mortgage, due to the fact that if any problems occur, payment would first be made to the first mortgage.

Companies also charge a lending fee, also known as points. One point is equal to one percent. For example, if you are borrowing $500 000 with a lending fee of 10 points, you will pay $50 000 in points. The points differ from one company to another; therefore I recommend shopping around before making a final decision.

Be aware of balloon payments where payment starts low, but increases very quickly. Rather take the fixed rate option.

Lastly, dont forget the additional closing costs such as, appraisal fees, application costs etc. If you arent capable of paying these fees, you may not be able to take out that second mortgage on your property.

If you are considering applying for a second mortgage, please think it through very carefully and consider all your options before making a final decision on taking out a second mortgage application.

Peter Owen owns a number of properties and helps new home owners and investors reach their property goals. You are welcome to follow these links to apply for a second mortgage. Its free. Second Mortgage or Property Refinance

Types of mortgage loans

There are several types of mortgage loans, each suitable for specific situations. The most common types are fixed rate, adjustable rate, and balloon loans.

Fixed rate mortgage loans

In a fixed rate loan, the interest rate stays the same throughout the term of the loan. Consequently, the monthly payment does not change, regardless of the prevailing market rates. This offers more stability for the mortgagor, but at the price of higher interest rates.

Fixed rate mortgage loans usually last 15 or more years. When the mortgagee grants a long term loan, they take on the risk of rising interest rates. This means that if the prime interest rate goes up, the lender, instead of the borrower, will pay the difference.

Adjustable rate mortgage loans

Adjustable rate loans start with a fixed rate for the first three to seven years, and then switch to an adjustable rate after the initial period. In this type of loan, the interest rate changes according to the market rates. This means the mortgagor assumes the risk throughout the loan. When the market rates go up, the buyer pays the higher interest rate. As a sort of incentive, the interest rate for the initial period is lower than that of the fixed rate loan.

Balloon mortgage loans

Also called a reset mortgage, a balloon mortgage loan starts with a very low fixed rate for seven to 10 years. After that, the buyer has to pay off the entire balance. Many people take out these mortgage loans and refinance their homes before it reaches the balloon phase. However, the risk in this scheme is that there is no way to predict the interest rates at the time of refinancing.

Refinancing mortgage loans

A common technique is to refinance a home while paying off a mortgage loan. This helps the owner find lower interest rates, reduce monthly payments, or avoid the risk of long term commitments. Refinancing can be done with most types of mortgage loans, depending on the mortgagors situation.

The simplest type involves switching between two adjustable rate mortgage loans. This is useful when the new loan has lower rates or shorter terms. It is also possible to switch between different types of mortgage loans, such as adjustable rate to fixed rate, or vice versa. The latter is usually done after the initial fixed rate period to maintain stability. Fixed to adjustable rates are ideal for people who do not plan to stay in the home for a long time, and thus may not find mortgage loans profitable.

Today with the state of the economy there are also loans called Short Refinance Loans. These help people where their equity in their home has fallen below their loan amount. For current information about this sort of loan do a standard search of Short Refinance Loan such as on Google.

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Although there are three types of reverse mortgages there are only two that are usually referred to. The most common reverse mortgage is formally called a Home Equity Conversion Mortgage (HECM). This type is backed by the federal government’s Department of Housing and Urban Development (HUD). The other type is called a proprietary reverse mortgage and is backed by private companies and not federally insured.

A reverse mortgage is simply a high cost loan, but no one seems to tell us that. The upfront costs can be very high. This makes it even more expensive if you stay in your home for a short period of time. This type of reverse mortgage is easy to get if you qualify by age and have sufficient equity. To put it simply – the older you or you and your spouse or partner are, the more likely there will be more equity making it more valuable so you would be able to borrow more money. You’re borrowing against your own equity.

As a former real estate broker I know a lot about reverse mortgages. They’ve been around for many years. But recent television commercials have made people much more aware of them.

There is so much television advertising for reverse mortgages right now and they make it all sound so good and the way to go but they don’t tell you about the high fees that go along with these loans. The federal government’s Consumer Law Center reports that a $250,000 loan could cost you $25,000 in fees. Because these fees are so high, a lot of money can be made so telemarketers are calling non-stop and pestering some homeowners and senior homeowners right and left.

There are many scams out there and scrupulous mortgage brokers. So even if you decided you want to pay the high fees and get a reverse mortgage it would be difficult to know who to go with.

Another problem that has been reported is that people, who have taken out reverse mortgages, were not able to get the monthly amounts they could draw on.

For a HECM you can choose a fixed monthly cash advance for a specific time for as long as you live in your home. The other option is getting a line of credit, so you can draw on the loan amount at any time or you can get a combination of the two.

So if you decide you want a reverse mortgage these are some of the things you want to know. Make sure the mortgage broker is reputable – check with your local better business bureau. Make sure you know exactly how much the loan is going to cost you in fees and find out ALL the limitations, there are many.

This is basically how a reverse mortgage works. Just remember that you’re taking out a high cost loan, that’s what it boils down to. Think other options. Explore home equity loans first especially when the interest rates are down and see if you can do better. You may want to consider selling your home and downsizing and tap your equity that way.

It may not be an easy decision depending on your needs. But there are lots of creative ways to tap the equity in your home. Seek them out before you risk getting a reverse mortgage.

For more tips and secrets about reverse mortgages or finding the best home loan or home mortgage go to Real-Estate-Financing-Tips.com for real estate financing tips, trade secrets, help, quotes and resources including refinancing, creative financing and bad credit real estate financing

What You Should Know

They Differ Depending on the State and Area You’re In.

If you thought that all home equity loan rates were created equally, then you’re wrong. Home equity loan rates vary greatly from state to state, and what’s more, they’re even different from city to city. These rates are set both by banks and by the federal government, based on things like inflation. While Michigan may have a home equity loan rate of 8%, New York might have a home equity loan rate of 7.55%.

They Depend on the Length and Principal of the Loan.

You might not think that home equity loan rates are based on the length and principal of the loan, but in reality, they are. Lenders want to make sure they get enough money out of the deal, so they look at the length of the loan and the principal of the loan when determining the rate.

They Depend on Your Credit.

Anytime a lender extends a loan to a borrower, they are taking a chance. They can tell how much of a chance they’re taking by looking at your credit worthiness. If you have a credit score that is low, then the lender is taking a huge risk in giving your a home equity loan, which means that the rate for the loan will be higher. Or if you have an excellent credit score, the lender will know they’re not taking a very big risk in extending the loan to you, and will be more inclined to offer you a better rate.

You Can Negotiate It.

With how tough the economy is right now, many lenders are willing to negotiate with borrowers if it means they’ll get more business. This means that no matter what your credit is, you can generally negotiate for a lower home equity loan rate than what they may initially offer you. How do you negotiate? By following the simple rule of making them think they’ll only garner your business if they offer a lower rate to you. Tell them you’re considering another company as that company will give you a lower rate, and the lender you’re talking may decide to meet the lower rate.

Home Equity Loan Rates Are Lower Than Other Loans.

Because the loan is secured to the house, home equity loan rates are generally significantly lower than other loan rates out there. This is one reason why so many homeowners decide to get a home equity loan as opposed to a traditional loan. It’s a lot less expensive in the long run.

More about debt consolidationDee Power is the co-author of several nonfiction books. Learn more about home equity loan rates. Read her blog on finance.

The finest way of having chosen one amongst the mortgage companies is that of sharing with the people around you their experiences. All you need to do is talk to the relatives or friends of yours who’ve of late bought a home.

The first and the foremost question to be asked is that whether they’re satisfied with service provided by Mortgage Company with which they had dealt with regards to purchasing of home.

Agents pertaining to real estate can also prove to be a fine source in regards with recommendations relating to mortgage companies. As agents see the people working out the monetary process on a day-to-day basis, a feel is developed for the mortgage companies that’re easy for working with, as well as the companies that aren’t easy for having worked with.

Even though word of mouth is the best way of developing the list of the impending mortgage companies, it definitely mustn’t be the only way to be used by you. Note that each and every one has diverse monetary situation. Moreover, what might work for one personality might not be suitable for the other one.

Effective use

Making use of the list containing mortgage brokers compiled by you, appointments can be made for going in and having a word with each and every one. Such an activity would give you an idea of demeanor and personality of every company.

Besides, if you face any problem regarding the calls o yours getting returned, or having set up appointments in the form of the prospective customer, the likelihood of your situation getting improved is less if the mortgage is secured through company.

Note that any of the mortgage companies fall in the category of service industries. Majority of people find process of home buying and mortgage approval do frightening that they end up forgetting that shopping should be done for the mortgage company they would be happy with.

The mortgage company must be glad to have quoted you with specified rates of interest, and intimate you regarding the time of locking in the rates.

These companies must also inform you about the specified costs involved in acquisition of a loan. In other words, you should get a fine faith estimate with regards to closing costs, origination fees, and discount, payment of which should be made, along with the other costs involved while having a home purchased.

Updating

Any of the mortgage companies must be upfront regarding every technical detail of loans. They must apprise you of penalty for the pre-payment, money needed for down payment, and the documents needed for making provisions for the approval of loans.

Mortgage companies must also inform you about guidelines that should be met o qualifying for loan, that too, with them. All this would be inclusive of your income, credit history, liabilities, assets, employment history, and the other specifications required.

Charles Bretz is a Financial Advisor and Author on Money Matters.Get Your Free Money Guide. Click Here