Are these loans easy to get if you have enough equity in your current home? Is there any negative connotation associated with getting a second mortgage
Answering the first part, it is basically a home equity loan. You are taking a loan out against available equity in your house. It generally is at a higher interest rate than what you would get on your first mortgage.
I took a second mortgage when I moved house because I had a long-term fixed rate mortgage that would have incurred punitive fees if I had cancelled it. Rather than doing that I took a second mortgage over the same term for the difference. As my second mortgage was with the same lender, they still had "First Charge" on the property (This means that in the event of default they have first call on the property to recoup their losses), so the interest rate was not higher (actually it was slightly less than my first mortgage).
My case is not that usual, normally a 'second mortgage' is with a separate provider that takes a "Second Charge" on the property. The interest rates are normally higher as a result as there is more chance that the lender will not recoup their money in case of a default as the first charge has priority. The second mortgage may still be cheaper than an unsecured loan, as the second charge provides some collateral, this might make it attractive if a sudden expense needs to be covered.
A second mortgage is a loan taken out on your house while you still have another mortgage secured by your house. They are a secured loan as they use the borrower’s home as security.
Some advantages of Second Mortgages:
- They allow you to borrow a large amount as the loan is secured against your home.
- They have lower interest rates than other types of debt.
- Unlike unsecured personal loans like credit cards, second mortgage interest rates are commonly in the single digits.
Some important points to consider when you take a second mortgage
If you stop making payments, your lender will be able to take your home through foreclosure, which can cause serious problems for you and your family.
Second mortgages can be expensive. You’ll need to pay numerous costs for things like credit checks, appraisals, origination fees, and more.
The mortgage rates are typically lower than credit card interest rates, but they’re often slightly higher than your first loan’s rate.
Second mortgages were also a popular way for home buyers without a down payment to borrow 100% of the money, but avoid certain extra fees if they borrowed all the money from a single lender.
For example, to borrow $100,000 on a house would incur something called PMI (private mortgage insurance). So to borrow $100,000 to buy my house, my payment might be $800/month, but I would have an additional $100/month of PMI to pay. (These numbers are totally made up and not based in math in any way)
So instead of that, borrows might get a first mortgage for $80,000 so they don't have to pay the PMI and get a second mortgage for the difference. This can be beneficial if the second mortgage payment is less than the PMI for borrowing 100%.
As far as I know they aren't as easy to get these days, like any loan you need to be qualified and I think 100% financing is probably harder to come by. The negative connotation is no worse than any other loan. I am personally against borrowing money, but if you had big medical expenses, major home repairs or some other emergency I could see it justified. Probably not for a big vacation or for new car though.