How Does A Second Mortgage Work?

For most of us, a second mortgage is used to finance emergency expenses. If you are feeling the effects of the credit crunch or need to finance an unforeseen expense, a second mortgage can provide you with the breathing room needed.

Also called home equity loans, the amount you can get will depend on the value of the paid up portion of your loan as opposed to the value of the property. Say your home is valued at $300 000 but your mortgage is only $150 000, you would be able to borrow up to $150 000, depending on affordability.

Normally speaking, you are going to get the best results from the bank that has the original mortgage and this is also usually the less expensive and faster way to go. They may be willing to go on the original appraisal report.

The second loan process is very similar to a primary loan – it will need to go through closing as well but the costs should be a little less. There are some things that you do need to know in terms of the difference between the two though.

The interest rate is bound to be higher because the loan is riskier for the bank. You will also not get as extensive a term to repay the loan because of the risk of default. These combine into higher installments.

You will have to make allowances for both payment amounts to come off your bank account and will have to ensure that you can afford both lots of installments. There are cases where it will make sense to refinance all your debt and others where a second bond makes more sense overall. It depends on what amount you need to borrow and how much you have already repaid on your bond. Learn how the mortgage amortization calculator Lacve can help you.

There are different options when it comes to a second mortgage, just as there are with a primary one. You could look at interest-only loans, balloon payments or a traditional payment plan. Balloon payments make installments more affordable but can also mean that a whack has to be paid back at the designated time.

Interest rate options can be fixed or adjustable – it depends on what your bank is willing to offer and what you feel is better for you. Make sure that you understand the terms in either case before committing yourself to the loan.