Home ownership offers the benefit of building equity as you live in the home and make your mortgage payments, and as the home appreciates over time. Home equity builds and can become a substantial amount. If you are struggling with high credit card debt, a second mortgage might be a good option to provide relief from high monthly payments combined with high interest and possible high fees. Tapping into your equity could provide a loan option that will help you pay off your credit card debt faster with a lower monthly payment.
WHAT IS A SECOND MORTGAGE?
When you buy a home, generally a mortgage is secured to pay for the home. This mortgage is called the first mortgage. If you receive a second loan against the same home, it is called a second mortgage. When you purchase a home the bank uses the property to secure the loan. This means that if you stop making payments, the bank will take your home through the foreclosure process, in order to pay the loan off. The lien position is important because that determines which loan is paid off first. The first lien is paid in full before the second lien. For this reason the first mortgage will offer a lower interest rate than a 2nd or 3rd lien as the risk to the bank of non-payment increases with each lower lien position.
Higher interest is also charged as the loan to value increases. Loan to value (LTV) describes the ratio between the amount that is owed on the home and the amount of equity. For example if you own a home that is valued at $200,000 and your first mortgage has a balance of $100,000, then you have 50% equity in your home or a 50% LTV. The bank will lend to a specified percentage of the loan to value. Terms will vary between banks along with the approval process. A second mortgage is generally held by the bank and not government backed. This leads to wide differences in the approval process and terms. Some banks lend as high as 90% to 95%, but it is more common to see an 80% LTV maximum.
The loan to value is calculated by taking the percentage first and then subtracting any outstanding loans against the property. This means a $200,000 home with a $100,000 mortgage at 50% LTV will offer a $100,000 second mortgage loan ($200,000 X 50%) – $100,000 = $100,000.
When you have equity in your home, debt consolidation may be the right option. Specialists at Finance Solutions can help evaluate your personal circumstances and help you decide which solutions will be most beneficial.
LEARN ABOUT OTHER LOAN OPTIONS
PROS
- Lower interest rates than credit cards.
- Flexible repayment term.
- Interest may be tax deductible.
- Leaves existing mortgage in place.
- Lower closing costs.
CONS
- Moves unsecured debt to secured debt.
- Must have equity, good credit and documentable income to qualify.
- Cannot access equity as the loan is paid down like a HELOC.
- Can take 2-4 weeks to close the loan.
- A drop in home valuation can reduce the amount you qualify for.
BENEFITS OF A SECOND MORTGAGE
- Establishes A Fixed Rate And A Fixed Term.
- Uses Equity In Home To Reduce Interest Rate.
- Flexible Repayment Period To Match Monthly Payment Ability (Up To 30 Years).
- Interest May Be Tax Deductible.
- Lower Closing Costs Than A Refinance, Often Higher Than An Equity Line.
- More Flexible Approval Than A Refinance.
- Faster Closing Than A Refinance. Generally 2 To 4 Weeks.
CHALLENGES OF A SECOND MORTGAGE
- Transfers An Unsecured Debt To A Secured Debt.
- Must Have Equity In Your Home To Qualify.
- 2 To 4 Week Closing, Which Is Shorter Than A Refinance But Longer Than Unsecured Options.
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