Second Mortgage Loans
Posted by admin on December 8th, 2011 filed in Mortgage
Mortgages can seem complicated enough for first-time buyers, so the concept of a second mortgage can prove too much for some homeowners. First or second mortgages, however, are in no way difficult to understand; only the terms imposed on mortgages are complex, describing trackers, interest-only options and fixed or variable rate repayments. Provided below is a guide to second mortgages, explaining what they are and how they work.
What is a Second Mortgage?
A second mortgage is essentially a loan that has been secured on the applicant`s property. Loans are available in two varieties: secured and unsecured. An unsecured loan is one that does not expressly use the borrower`s home as security for the debt. A secured loan is one that does use the home as security; thus, a borrower could lose his home if he defaults on a secured loan (in fact, he could still lose his home if he defaults on unsecured loan repayments and the lender successfully applies for a charging order on his property).
The way in which a second mortgage works is somewhat different from that of a traditional secured loan. A second mortgage deals with the equity available in a property, which is why it is sometimes referred to as a home equity loan. Equity is the value of a property less any existing debt; for example, a home valued at £250,000 yields equity of £175,000 if the homeowner has a first mortgage worth £75,000. In this example, the homeowner could apply for a second mortgage up to £175,000.
Why Apply for a Second Mortgage?
Applying for a second mortgage is not a decision that ought to be taken lightly. Releasing more equity from a property in return for increased debt can prove disastrous if the borrower does not understand the process or if he simply cannot afford repayments. As with any type of secured finance, the borrower risks losing his home if he defaults on repayments for a second mortgage.
The obvious reason why homeowners apply for a second mortgage is to raise a lump sum of cash. In the above example, the homeowner could be granted up to £175,000 for a second mortgage, which is enough to pay for all manner of expenses.
Typical uses for a second mortgage include paying for property repairs or making home improvements, such as installing an extension, converting a loft or fitting solar panels on the roof (at an average cost of around £15,000 on large properties). A second mortgage could also be used to pay off student fees or existing debts, while it is not uncommon for applicants to release equity in their homes to pay for a new car or holiday. One of the most common reasons for applying for a second mortgage is to finance the purchase of a second property, an especially viable option at the moment considering the low base rate and falling house prices.
Remortgage or Second Mortgage?
Some people confuse second mortgages with the process of remortgaging a property. A second mortgage is different from a remortgage, however, which occurs when the borrower switches mortgage lenders (a process that often involves releasing more equity). A second mortgage is a type of loan that is distinct from the first mortgage; indeed, repayments for a second mortgage will usually be charged separately from those of the first mortgage.
Any form of borrowing requires the applicant to consider his position very carefully before proceeding with an application. This is especially true of second mortgage loans, which are secured against the borrower`s home and invariably involve large sums of money. Comparing the market with Moneysupermarket to identify the best rates for second mortgages is a vitally important step before applying for a home equity loan.