Second Mortgages – Definition, Benefits & Advantages
What Exactly Is A Second Mortgage?
A second mortgage is a term used to define the charge over a property that already has a mortgage on it. In order to make things more easier, a ranking of the mortgages has been created, which depends on the order in which they were created. When debt is not properly paid and the property is sold to someone else, the lender will eventually receive all the money back, with the 1st mortgage having priority and being paid first.
As a concrete example, if you had a $100,000 mortgage secured on the loan for your home and then applied for another one with the same value but from another lender, this last one would be considered the second mortgage, behind the first one. If you are unable to pay for the two loans and the property is sold for an amount of $190,000 then the first one will need to be fully repaid and the second lender will only receive the remaining amount.
Featured Low Rate Home Loan
Apply for Illawarra Home Loans Bank Beater Home Loan and get a low variable rate, beaten down even further by 0.05% p.a. after 5 years, plus no application fee, no valuation and lender's legal fee.
- Interest Rate of 6.07%
- Comparison Rate of 6.35%
- Application Fee of $0
- Maximum LVR With LMI: 90%
- Minimum Borrowing: $250,000
- Maximum Borrowing: $1,000,000
How To Properly Use a Second Mortgage
It is very common for most of the people to choose to refinance their loan to a different lender, rather than having a second one for the same property. However, there are a great number of situations when the second solution is the right and most appropriate one.
For example, if your loan is a fixed rate one then you might have to pay high exit fees or simply not want to refinance because of the value of this fixed rate, which might be much lower than most of the variable rates established by lenders. In a situation like this one, what you will really want to do is use a second mortgage.
Furthermore, if you are trying to offer help to your children so they could buy their first very own home, you may also want to guarantee for them using a second mortgage over your property. In this situation, this mortgage will provide the lender with additional security for the bank.
Last but not least, there are many private lenders who can take advance funds in less than 48 hours and therefore choose to take a second mortgage as means of security for a certain loan. Because of this, it is completely recommendable to avoid private lenders by all means.
The Amount You Can Borrow
If you are applying for a second mortgage with the same bank that has issued you the first one, then you can only apply for 95% of the value of the property. However, if the bank is a different one then the limit is evaluated at only 85%.
Finally, low doc loans are not available as a second mortgage, with the single exception of private lenders, which are not recommendable. There are also some lenders who can offer you discounts for this loan, but this situation is a rather rare one.
You should also know that your first mortgage will always have to consent to you before trying to obtain a second one for your home or other property. Otherwise, you will be charged a fee of approximately $300 for having your application assessed by the lender.
All in all, if you are careful with using them, second mortgages can provide you with many advantages in certain situation and you should always be aware of this alternative.
Related Posts
- Second Mortgage Tips - Ready To Get An Approved Loan Again?
People take out a 2nd mortgage for different reasons, such as college tuition or home improvements. Discover some mortgage tips to guide you in whether or not this type of loan is right for your needs.
Ask A Question