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 What is a Second Mortgage Loan?


      A Second Mortgage Loan is a mortgage granted, (and registered) when there is already a first mortgage registered against the property. If you are like most homeowners, you probably have a first mortgage loan on your home. As you make monthly mortgage payments and the value of the home increases, your interest in the property (called "equity") grows. After a while, some homeowners may wish to borrow against the equity in their home to get cash, to make home improvements, to educate their children, or to consolidate personal debts. Because such loans are in addition to the first mortgage on the home, they are commonly called second mortgage loans.  

      Second mortgage loans are different from first mortgages in several ways. They often carry a higher interest rate, and they usually are for a shorter time, 15 years or less. In addition, they may require a large single payment at the end of the term, commonly known as a balloon payment.

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     Traditionally, second mortgage loans are offered with a fixed loan amount and a predetermined repayment schedule. Some lenders now offer lines of credit that allow you to obtain cash advances with a credit card or to write checks up to a certain credit limit. These often are called "home equity lines" because the equity in your home is collateral for the amount of credit you request. As you pay off the outstanding balance, you can reuse the line of credit during the loan period.


 Comparing a Line of Credit to a Second Mortgage Loan

         If you are thinking about a home equity line of credit you also might want to consider a more traditional second mortgage loan. This type of loan provides you with a fixed amount of money repayable over a fixed period. Usually the payment schedule calls for equal payments that will pay off the entire loan within that time. You might consider a traditional second mortgage loan instead of a home equity line if, for example, you need a set amount for a specific purpose, such as an addition to your home or a debt consolidation. 

         In deciding which type of loan best suits your needs, consider the amount of credit granted under the two alternatives. In general, selecting a second mortgage will allow you to borrow up to 100% of your home value in selected areas. 

         The interest rate on Second mortgages is slightly higher than it would be on the Home Equity Line of Credit simply because there is a much higher risk to the lender in case of your default, however it will provide you with a very affordable low monthly payment. In many cases a second mortgage can be amortized over 25 years.


Second Mortgage Repayment and Length

           If you have a fixed-rate loan, the interest rate is set for the life of the loan. However, many lenders offer variable rate mortgages, also known as adjustable rate mortgages or ARMs. These provide for periodic interest-rate adjustments. If your loan contract allows the lender to adjust or change the interest rate, be sure you understand when the lender has the right to change the interest rate, whether there are any limits on how much the interest or payments can change, and how often the lender can change the rate. You also should know what basis the lender will use to determine a new rate of interest.

         Some second mortgage loans may extend for as long as 15 or 20 years; others may require repayment in one year. You will need to discuss the repayment terms with the lenders and select one who offers terms that best suit your needs. For example, if you need to borrow $20,000 to make repairs on your home, you may not want a loan that requires you to repay the entire amount in one or two years because the monthly payments may be too high.

          BE SURE you understand how much your monthly payments will be and what they cover. Your lender should be able to give you this information in advance. With some loans, you will be required to make monthly payments on the principal and interest. With other loans, you may be required to pay interest only on the borrowed amount; in these loans, your monthly payments will not reduce the principal amount of the loan. With such a loan, you will be required to pay back the entire borrowed amount at the end of the loan period. These loans are popularly known as "balloon loans." If your loan has a balloon payment, you should consider how you will arrange to repay the entire amount when it becomes due.

         On "home equity lines," the lender does not have to give you the exact amount of the monthly payment, but must explain how it is figured. This is because the borrowed amount will vary and your outstanding balance will change if you use the line of credit. However, if your monthly payment term is 5% of the outstanding balance and your outstanding balance is $5,000, your minimum monthly payments would be $250.


 What will it Cost?

         The cost of arranging a second mortgage or a Home Equity Line of Credit will vary widely. You can expect an appraisal fee, lawyer fee, broker fee and sometimes even a lender fee on both of these products and these can add up.

         Many companies will charge a fee for lending you money. The fee is usually a percentage of the loan and is sometimes referred to as "points." One point is equal to one percent of the amount you borrow. For example, if you were to borrow $10,000 with a fee of eight points, you would pay $800 in "points." The number of points lenders charge varies, so it may be worthwhile to shop around. If the fee seems too high, you may be able to bargain for or find a lower fee. Be sure to get the amount of the fee in writing before you take the loan. Many states limit the amount of fees a lender may charge on a second mortgage loan. You may want to check with your state's consumer protection office or banking commissioner to determine whether there is a limit in your state.

          In practice, the only fee which you pay when the loan is approved is the appraisal fee (about $150 - $200) and all the other costs are either added to the money you need or deducted from the second mortgage proceeds on closing.


What do I need to do to complete the process? 

          Here is a list of documents you may need to obtain second mortgage financing:

  1. Copy of your Deed

  2. First/Last Mortgage Statement

  3. Copy of your Property Survey (or Title Insurance)

  4. Employment letter

  5. 2 most recent pay stubs

  6. Last 2 yr T4's or Notices of Assessment

  7. Fire Insurance

          2nd mortgages can offer a practical plan for consolidating debts. Also, because 2nd mortgages may be tax deductible, non-deductible interest payments may be converted into deductible mortgage interest. There is no equity required, with 2nd mortgages up to 125% loan to value. Your home is eligible for a loan, even if you currently have no equity.

          2nd mortgages are simple interest home loans, which means interest is compounded annually, as opposed to credit cards that charge interest compounded daily, where you can pay up to 3 times more interest. You can use your mortgage to pay off credit cards, personal loans, car loans, taxes, or most any other debt. The flexibility of the program allows for a combination of paying bills, improving your home, or taking cash out for your personal use.

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