What Is a Second Mortgage?

A second mortgage is a widely used type of loan that can help those with a mortgage to fund various different things. Some of the most popular reasons include home improvements, home repairs (find out more here) or to pay off any existing debts. Other common reasons why homeowners want to take out a second mortgage include the following:

• If the homeowner’s mortgage has a significantly high early repayment charge. Taking out a second mortgage might make it cheaper than a re-mortgage
• It may be that a homeowner is having difficulties getting other types of loans (e.g. personal loans), and will have better luck with a second mortgage
• Other situations where homeowners are struggling to keep up with their mortgage payments, e.g. having a credit rating go down. Re-mortgaging a home in this instance could result in larger interest on the mortgage as a whole, whereas getting a second mortgage would just create additional interest on the new loan

Like with a first mortgage, failure to make payments on a second mortgage could result in foreclosure, and lead homeowners to lose their homes. However, in many cases of those taking out second mortgages, the potential benefits will outweigh the risks. For example, a person using the money to grow their dental business (more information) by opening a regional branch business in another city, may use a second mortgage on a residential property to pay for the opening of the new branch.

Therefore, whatever the reason for taking out a second mortgage, it is important to know exactly what this type of loan is, and the responsibilities that come along with it before applying. Knowing this can help to effectively prepare a borrower for such a loan, thereby reducing the risk of any issues occurring from lending it. For those who are only looking to borrow a small sum of money, it might be best to consider other means of borrowing.

How Do Second Mortgages Work?

A second mortgage is a loan that can be taken out for those who have an existing mortgage, using the property under said mortgage as security for repayment of the second mortgage loan. As the name suggests, having a second mortgage means that a borrower will now have two mortgages on their home. Whilst being a homeowner is necessary to take out such a loan, it is not required for borrowers to live in this home; second mortgages can also be taken out on buy-to-let properties.

The application process for a second mortgage loan is very similar to that of the first charge mortgage. The property will more often than not require an appraisal to determine the value of the property and furthermore how much the homeowner can apply for in their second mortgage loan application.

The actual process of applying for a second mortgage can take a while, with an origination fee typically charged and applicants being evaluated on features including, but not limited to, their credit score and valuation of the house. The loan is paid in one instalment, and is a set amount that has been previously determined and agreed upon way before the schedule of said payment.

It is worth knowing that the interest rates for a second mortgage loan will often be significantly higher than those of a first mortgage. Therefore, when considering the value of a second mortgage loan, it is important to account for interest rates and adjust the value of the loan accordingly with what borrowers can confidently afford.

How much can I Borrow With a Second Mortgage?

The amount of money borrowers can be loaned from a second mortgage will depend entirely on the equity of their home. Lenders of a second mortgage will typically offer anything between 75% to 100% of a home’s potential equity. Therefore, before taking out this type of secured loan, it is vital to work out exactly how much equity a home has. After this has been determined, homeowners can therefore make an informed decision on how much they would like to borrow with their second mortgage loan. You can work out the equity of a home by subtracting the amount still owed on a first mortgage from the overall value of the house.

As everyone’s situation is different, when looking for a second mortgage it’s good to have a look around a few different sites, and maybe consider using a comparison service. Comparing numerous offers could lead to homeowners finding deals that best suit their situation.