You must have heard of first mortgages as well as second mortgages. But the concept of a second mortgage might not clear to some. One of the common questions is- how can you go to take out a second mortgage on top of another one?
Here will talk about that question and explore how second mortgages work. But first, we need to know:
What are these second mortgages exactly?
First of all, know that a second mortgage can be classified as another kind of loan. It more closely resembles a home equity kind of loan. Here a lender looks at your property papers and approves the new loan while knowing full well that the old mortgage hasn’t been paid off.
Note that this new mortgage will have no connection to the first one you took out. So it will have its closing costs, application, and regular monthly payments as well.
How can second mortgages work when another mortgage is already taken?
Before we move on to answering this question, know that when your lender allows for another mortgage, he or she takes your property as security. But the rights of this second lender are subordinate to that of the first one. So if you default on any mortgage and one of the lenders decides for foreclosure, the lender who gave you your very first loan will get paid first.
As such due to this, second mortgages are riskier and so the interest rates are higher as well. Now that we have made that clear, it’s time for an example to make it all clear.
Imagine you bought your dream home for $200,000. In here you give a 20% down payment of needed $40,000 while borrowing the next $160,000. Now imagine you have been successfully paying for multiple years and so now you have a leftover balance of around $120,000.
Let’s say, now you want to build another floor and for that, you want to borrow against the equity provided by your home. This second mortgage will allow you to get a maximum of 85% of your property’s value. So considering this you apply for another mortgage.
The appraiser will again newly look at your home in this case. Let’s say your home now values at $210,000. So if you subtract $120,000 of the leftover first mortgage amount from it, you get $90,000 in total equity. Now, assuming that you have a good income and credit, you can get up to around $75,000 in your second mortgage.
After that, you will have to again begin paying for it monthly as you do with the first mortgage.
So this is how second mortgages work. Note that if the issue isn’t too serious, it’s advised that you refrain from taking out another mortgage. It will be too difficult to manage and you will have the additional burden of making another separate payment. Instead, it’s advised that you save up for emergencies and make repairs from there. It will cause you less stress and tension overall.