There are many home owners who have needed extra finance but have no idea what second mortgages involve, and as such completely overlook a very easy source of capital.
Here we aim to clear up most of the commonly asked questions when it comes to refinancing your home for further investment, or even just some home improvements. Take some time to read each one through so you can make a better decision on whether taking out a second mortgage is a reasonable idea or not.
What is a second mortgage?
Second mortgages are quite simply an extension of the already existing mortgage on your home. The lien extension is calculated in a slightly different way, as the lender will often have to reconsider the current market in your local area. In terms of the repayments, you can either have fixed rate repayments or flexible repayments. In the flexible repayments schemes, you will normally find that the mortgage acts more like a line of credit rather than a direct loan.
How much can I borrow?
The amount of your loan can greatly depend on a couple of factors. First off, the lender will assess the local market to see how much value your home now bears. This is then calculated against the equity that you still have in your home. Often, the most common percentage of remaining equity that is offered is around 95%, but some lenders will push up to 125% of available equity depending on your age and repayment history. Remember that your end figure will be minus any fees and costs involved, so you may be offered 100% of the remaining equity but only end up receiving 90%.
What interest rate will I be looking at paying?
What you must consider is that from a lender's point of view, anyone who takes out second mortgages is in a higher risk category than someone who is almost paid up on their original mortgage. In general, you will find that the interest rate of your original loan will be considered, and anywhere between an extra 2-5% will be added. While this may seem a little steep, it could be well worth the effort to switch mortgage providers to someone with a cheaper interest rate to save in the long run.
How will this affect my first mortgage?
In short, it won't. The rates and repayments of your first mortgage will remain exactly the same, so be sure that you can afford the extra repayments that will be required on the second mortgage.
What repayment terms can I expect?
As with your first mortgage, your repayments can be spread across anything from 10 to 25 years and up. This is very much dependent on your age and the risk category that you fall into. Be sure when choosing your term that you can afford the repayments on both of your mortgages.
So as you can see, second mortgages are a viable option for boosting your available finances. Speak to your lender today and see what they can offer you, as you may be pleasantly surprised.