It is possible to take out another loan against a property, even if the first mortgage is still outstanding. The money difficulties faced by many in the current economic climate have made second mortgages increasingly attractive as way of reinforcing financial security, particularly if borrowers need to raise money and have no other means of doing so.
What is a Second Mortgage?
A second home mortgage does not replace your existing mortgage; rather it acts as an additional loan, of secondary importance next to the main loan. It still means, however, that the borrower will have essentially two mortgages on their home, allowing them to use any equity that has accrued on their home as security against another loan. Equity is the percentage of the property owned by the borrower: it is made up of the value of the home, less the unpaid value of the original mortgage. Taking out a second mortgage is a way of tapping into this equity: some common usages for this are the paying of bills, and the paying off of other debts such as credit cards and unsecured loans. This debt consolidation is an increasingly popular use of second mortgages.
Many people also use second mortgages to fund home improvements. This has the potential to increase the value of the home, thus helping to counter the increase in debt necessitated by taking out the second mortgage.
However since taking out a second mortgage means acquiring additional debt, care should be taken: monthly repayments will increase, and additional mortgage fees are often charged as part of the process. It is essential that anyone taking out a second mortgage ensures the have the income to cover these increased monthly payments before doing so.
How to Get a Second Mortgage
If you already hold a mortgage for a house, and have accumulated equity, a second property mortgage can be taken out. In other words, a refinance second mortgage can only be taken out if the value of your home has increased since you bought it.
Second home mortgages can be taken out from most mortgage lenders, including banks and building societies, and the borrower doesn’t have to take one out from the same lender they used for their first mortgage. Mortgage brokers, for instance, can often find competitive deals. Most second mortgage lenders do, however, consider second mortgages to be riskier than a first mortgage, and therefore impose higher interest rates. When considering someone for a second home mortgage, the second mortgage lender will usually take into account whether there is significant equity in the first mortgage and if the borrower has a solid enough income to ensure they will see their money again.
Advantages of Second Mortgages
The term of second property mortgages can last for up to 20 years, though the repayment period can be for as little as one year. Refinance second mortgages are very flexible in this way as they can also be an easy way of raising extra cash as opposed to other methods. For example, if a borrower has a low credit rating since taking out their first mortgage, remortgaging would result in higher interest payments on the entire mortgage, whereas a second mortgage simply requires additional payments on the additional loan, with the payments for the original loan being left unchanged.
Disadvantages of Second Mortgages
Nevertheless, the risks involved with second home mortgages means considering whether to take one out should be given serious thought. As a great deal more debt will be incurred by taking out a second mortgage, if the borrower cannot keep up the repayments on either the main or second mortgage, this may ultimately mean repossession of their home. Because of this great risk, interest rates are usually higher than with first mortgages, so second mortgage rates should therefore be compared thoroughly between lenders to ensure such a mortgage can be afforded.
Before taking out a second mortgage, a second mortgage calculator can be of great use when deciding whether quickly raising extra money overrides any additional mortgage fees.