Second mortgage: advantages and pitfalls
Over time, the cost of your mortgage housing can grow significantly and this higher value can be used as a collateral to take the second mortgage (aka home equity line of credit).
The sum of the second mortgage may reach up to 80% of the current price of your property. You may choose to apply for a credit line or a lump payment. The first option is alike a credit card: you can take out money several times up to the determined credit limit, redeem the debt and take it once again. The lump payment is typically repaid as a common loan on a monthly basis with fixed interest. The interest rate terms can be negotiated depending on your particular preferences and goals.
Individuals usually take out second mortgage to repair and renovate their housing, finance university education and optimise the existing debt burden. Many homeowners used to take the second mortgage to purchase one more piece of property. Today this scheme is not as popular as before the financial crisis of 2008, because banks issue such borrowings more circumspectly.
The key benefit of second mortgage is the opportunity to borrow large sum of money under comparably low interest rate, because the loan will be secured by physical property, which means lower risks for your lender. Also such loans does not require any upfront payments and provide comfortable repayment schedule.
The law provides a system of interest rate deductions that may help make your second mortgage less expensive.
First of all, second mortgage provides the risk of loosing your home. Bankruptcy and foreclosure can result into very painful experience both for you and your relatives, so it makes sense to spent the borrowed sum to improve your property and raise its market price or to optimise existing debts.
Credit application process requires expenses such as property appraisal, fees and credit insurance. If your personal credit history is not very impressing, second mortgage can result into rather expensive option equal to a typical unsecured purchase loan.
Prepare yourself for higher interest rates compared to the first mortgage, because in case of your foreclosure, second lender wont get any compensation before the debt to the first lender is repaid completely.
How to get
If you decided to apply for the second mortgage, it makes sense to consider several proposals by different banks. The process will take at least several weeks, because your potential lender will have to analyse your property and credit history. Your bank will require the following documents: completed credit application, banking statements, details of tax returns, property pay stubs and information about bad lending practices.
Beware of tricky conditions such as unnecessary insurance fees, prepayment penalties, which enables you to redeem the debt ahead of schedule or ballon payments that force the creditor to repay the debt with one large sum at once.