Secured Loans and Second Mortgages - Important things to consider

A second mortgage is when a loan is made in addition to your first mortgage, and it's based on the amount of equity you have built into your home. Many people use them to fund home renovations, to pay off credit cards, or to put a child through college. Since you've already been through the process once, the underwriting required to get a second mortgage is much simpler than it was the first time around, and the cost of the transactions involved will be significantly lower. This usually makes up for the fact that interest rates on the second mortgage are a bit higher than they were on the first one.

On a second mortgage, you will borrow a fixed sum of money against your home equity, and pay it back over a specified amount of time. The amount you borrow will be combined with the amount you still owe on your first mortgage. If you're thinking about releasing equity in your home through a second mortgage.

Here are some things you'll need to consider before you take the plunge: -

1. Interest rates on second mortgages
The interest rates charged on second mortgages are often higher than those that are levied on first mortgages. This is because lenders see second mortgages as a higher risk than first mortgages and so compensate for this risk through fixing higher interest rates on second mortgages.

The increased risk factor on a second mortgage is down to the fact that these types of mortgages are a second charge on the property. That is to say that in the event of you defaulting on repayment to the point that your home is repossessed, the first mortgage lender legally gets first bite of the cherry when it comes to recovery of the loan. For second loans secured against the property, the lender has to wait its turn, running the risk that it may recover only part of the loan advanced or in some cases none of the loan advanced.

2. Lending criteria
Different lenders have different lending criteria for second charge mortgages. Whilst all lenders are likely to assess applicants for a second mortgage on the value of their home, their ability to repay the loan and their current income to debt ratio, not all lenders will give the same weight to these factors in the final analysis. This is why you may be rejected by one lender but accepted by another on an almost identical second mortgage offer.

Can you afford the repayments?
For a lender to be convinced that you are able to meet the repayments on a second mortgage, you'll need to be sure how you're going to repay the loan. You should never take on a second mortgage without first planning how you will pay the money back.

Different types of second charge mortgages
There are several different types of second charge mortgages to choose from. Be sure to get information on all your options and select the type of second mortgage that is most suitable for your circumstances. It is advisable to never borrow more than the current equity value in your home.

It all sounds pretty simple. There are just a few things to keep in mind:

1. First of all, don't take out a second mortgage on your home unless you've built up a fair amount of equity in the property already- that is, made payments on the original mortgage balance for a good amount of time. You may still be able to get a second mortgage if you don't have much equity, but your rates will be so much higher, and the amount you can borrow so much lower, that it will essentially be a waste of your time and money. This is one of those things that is worth waiting for.

2. Also, look into the other options of borrowing against the equity of your home, including a home equity loan and a home equity line of credit. All of these options allow you to borrow against your equity, but there are slight variations among them that mean one of the three may be the best option for you. It will depend, for the most part, on your particular financial standing, the amount of money you need to borrow, and the amount of home equity you currently have.

A second mortgage has the influence to put you in a better place if you utilize it appropriately, but can also provide disastrous results when inadequately timed. Such catastrophic consequences contain ending up paying higher rates, holding longer re-payment periods, an alteration in heart that could guide to yet a third refinance, or even the most horrible: foreclosure.