In essence, a 2nd mortgage is a type of a home equity loan, but instead of giving options such as a line of credit, it is strictly a loan usually intended for a specific purpose. Good reasons to consider a home equity loan include large amounts of debt because of high interest credit cards or medical expenses, needing money to invest in a business, to pay college tuition or needing money to purchase an automobile.
If you are looking for the ability to access cash over a long period of time, than a second mortgage probably is not your best bet. Instead you may look towards a line of credit. A 2nd mortgage works best for those interested in one lump sum.
For the most part, a second mortgage will only offer fixed interest rates for borrowers. Although many will offer repayment schedules of 30 years, most are closer to between 10 and 20 years. This has to do with the fact that the borrower usually only has enough equity built up to take out a great deal less than the value of the home, so the loan amount will be less.
The amount that you will be able to take will vary from mortgage lender to mortgage lender and from state to state. Some states will only allow lending institutions to make a 2nd mortgage loan for 85% of the appraised value with the difference of the balance you owe. Then again, there are other states that will allow upwards of 125% of the appraised value minus the amount owed on the property. The lending institution will also take into consideration your previous mortgage payment history and your credit report.
Keep in mind that you do not have to take a second mortgage out with your current lending institution. You have the option to look at second mortgage rates with other lending institutions to see if they can offer you a better deal. Although your current bank or mortgage lender may have had the best deal when you looked for your first mortgage loan twenty years ago, they may not have the best deal now, so be sure to shop around.
Another important point to keep in mind is that 2nd mortgages usually carry a higher interest rate. This is not always the case, but when you begin shopping around for a second mortgage you may find that the rates are slightly higher. For one, the life of the loan will be shorter and since the loan amount is likely to be less than the first mortgage, the mortgage lending institutions will be looking to make their interest off of the loan. This also has to do with the fact that if you default on either your first or 2nd mortgage, you will be looking to pay off your first mortgage before the second.
One of the most important steps to getting a good second mortgage is to insure that you get a good appraisal on the home. Making sure your appraisal value is set against the current market value will mean you have the opportunity to take more money out.
Common reasons for applying for a reverse mortgage include seeking extra income to supplement social security paychecks or seeking full-time retirement. In order to qualify, the home must be a single dwelling home, a townhouse, or a two to four condominium unit. Mobile homes will not qualify for this type of mortgage.
Keep in mind that these equity mortgages are not available to everyone. They are almost exclusively considered government loans by the Department of Housing and Urban Development and are only granted to those 62 years and older. Other stipulations include owning the home outright and being required to use the proceeds of the reverse mortgage to pay off the remainder of the home before taking the remainder of the lump sum.
There are determining factors for how much a person can borrow. These include the age of the person, the value of the home and the current mortgage interest rates available. Typically, more is available to those with a higher home value and to those who are older. HUD does not take into consideration a person’s income as a deciding factor of how much they can borrow.
There are also different ways to receive your cash equity amount in your reverse mortgage. This includes: tenure, equal monthly payments as long as the borrower lives in the house; term, equal monthly payments for a fixed number of months; line of credit, in installments or when the borrower needs the cash until the credit amount is exhausted; modified tenure, a combination of a line of credit and monthly payments for as long as the borrower lives in the home; modified term, a combination of a line of credit and monthly payments for a set period of time.
How the equity mortgage gets paid off is a big concern to main interested in this type of mortgage. The borrower is not required to repay the loan as long as they continue living in the home. If they have to go into a care facility for more than 12 months, the home is sold, or the owner passes away, the estate will pay the remainder of the loan or the loan will be paid off from the proceeds of selling the house.
If an interested party is concerned that their home will be sold but wants to keep the home in the family name, they can rest assured that their home will not be taken as collateral. Instead, upon the death or moving out of the borrower, their estate will help to cover the costs of the amount borrowed and the home will remain in the family name if so desired.