A second mortgage is an additional loan taken out on a property that is already mortgaged.
There is always more risk for the lender and as such, the interest rates are much higher than traditional mortgages. If the borrower ever defaults on their payments and the property taken into possession, the lender in first position would always be paid out first followed by the lender in the second position. If the costs are high and there is not a lot of equity, the second runs a higher risk of not being paid out in full.
For individuals with an existing mortgage, who have good credit and more than 15% equity in their homes, the most affordable second mortgages will be in the form of a home equity line of credit or HELOC. However, if the homeowner has weaker credit and/or little equity in their property, or unverified or is self-employed, a second mortgage through a trust company or private lender would be required.
Why would you need a 2nd mortgage?
A second mortgage can be a great way for homeowners to consolidate debt. Though second mortgages often carry higher interest rates than first mortgages, these rates are still often lower than high interest credit cards, car lease payments and in some cases, lower than unsecured lines of credit.
2nd mortgages can also be used for things such as renovations and/or emergency cash for repairs. If you your second mortgage to consolidate debt and help you meet other financial commitments on time, this can improve you credit score over time and allow you to qualify for a mortgage with a prime lender in the near future.
How do I qualify?
There are many factors involved in qualifying and a mortgage expert can help. These include:
- The more equity you have available in your home, the better chance you have of qualifying. You must have more than 15% available in your home.
- Lenders want to verify that you have a dependable source of income, to ensure that you can make payments. If you are self-employed, you will typically need a B-Lender or private funds which will have a higher interest rate.
- Credit score. The higher your credit score, the lower your interest rates. Always look after your credit rating.
- Because of the risk, the location, type and value of your property also determine if you will qualify for a second mortgage.
Going to bank will only give your options they sell were as a mortgage agent has access to over 50 lenders. Talk to a qualified mortgage agent to get all the answers and to discuss your individual mortgage needs.