When should you consider a second mortgage

May 2, 2012 - PRLog -- A second mortgage is a type of secured loan, which is made subordinate to another loan. In principle, a property may have a second, third, and forth mortgage, although the latter two are rarer. This mortgage type is suitable if you need a large amount of money. Finding cash may be difficult while the credit limit on your card is not unlimited. This is when you may think of a second mortgage.

If there is a lot of value or equity in your home, you may opt for a second mortgage. Having a lot of equity allows you to borrow a larger sum of money because a mortgage against your home will be considered safer.

Before you consider applying for a second mortgage, you should know whether you are a likely candidate. Lenders have certain requirements when assessing applications for a second mortgage. Among them are high credit score, low debt-to-income ratio, considerable equity in your property, and solid employment history.

People usually use second mortgages to buy additional homes, make home improvements, participate in a debt consolidation program, and create a home equity line of credit. There are other reasons why people take second mortgages and some of them are not wise. The reason is that you borrow against your home, and you risk losing it. Make sure that the funds’ intended use is worth taking the risk.

You should consider a second mortgage only if you can afford to make payments. Note that second mortgages are offered with higher rates than standard mortgages. The reason is that this mortgage will be paid only after the first one had been paid off. This is in case of default. Second mortgages are riskier from the lender’s perspective, and the rate of interest is slightly higher. On the other hand, the interest rate may be even lower, compared to other sources of credit (e.g. credit cards).

Even if you consider that a second mortgage is a good option, it may come with hefty fees. Depending on the amount and term of the mortgage, it may not work well because of the second mortgage fees.

If you are decided on making this step, you can apply for a second mortgage in almost any institution. Some lenders will be happy to extend you a big-ticket loan. One place to start is a financial institution you already have a relationship with. This can be your credit union or local bank. Of course, you can apply with the institution which has your first mortgage. This may save you some money in fees.

Still, when should you consider applying for a second mortgage? Getting a second mortgage may be necessary as to pay emergency medical expenses, pay education expenses, or care for dependents. Some people also consider a second mortgage if they seek to make an investment. Transportation and home remodeling are two other reasons. A second mortgage can be used for debt consolidation, but only if it makes sense. Of course, lending institutions may not be thrilled to extend you a loan for entertainment purposes or depreciating assets, but this does not mean they will not do it. Then, you may think that it is none of your bank’s business what the money will be used for, but the intended use will be taken into consideration.

Even if you take a second mortgage for the right reasons, you should not forget that you pay at a higher rate of interest. It is not a good idea to treat a second mortgage as a primary mortgage. A second mortgage is a debt to be paid off as quickly as possible. Moreover, it is an additional cost to factor into your budget. On the bright side, second mortgages are a type of fixed loan as opposed to loans and credit cards with a variable interest rate. This means that borrowers know what the monthly payments will be and can factor them into their budget.

For more information on mortgages in Canada visit: http://www.canadabanks.net/