The main reasons why homeowners may require a second mortgage on their already existing mortgage remains the same even after the housing sector downfall. However, what has changed within this period is how mortgage lenders see second mortgages and the level of restrictions they have imposed on this form of mortgage loan.
Principally, people who want to buy a home for the first time but do not qualify for a large sum of money due to their financial background can choose to go in for a mortgage loan that will be around 80% of the home’s market value. They can, afterwards, seek a second mortgage loan of about 20% to top it up. Through this means, this borrower has been able to raise enough money to pay for the total cost of the home.
For the homeowner, a second mortgage makes it possible for him or her to acquire money that can be used to expand an existing home. Take for example, a couple who need to move into a bigger home because the size of the family has increased. This couple can decide to take advantage of second mortgage to carry out expansion works on their old home.
Other homeowners also use second mortgages as a means of financing the rehabilitation and refitting of their homes. According to experts in the mortgage sector, second mortgages were common in the mortgage industry during the days of the housing sector boom. Today, stricter laws enforced by mortgage lenders have made this form of home loan very difficult to acquire although homeowners who are duly qualified can at all times have access to it.
Most people have questioned why a borrower who needs to move into a bigger property cannot simply sell out the home, pay off the old mortgage and then acquire a new home loan. Or better still; refinance the old loan with a huge new loan that can help accomplish this aim. Perhaps the issue of refinancing the old loan with a new loan of higher amount may sound like a great option for the borrower, considering the fact that mortgage rates are very low.
However, distress financial conditions will make a lot of homeowners ineligible for high principal mortgage loans. On the other hand, if these borrowers are to apply for second mortgage, they would be in a position to obtain enough money to carry out their intended projects.
Second mortgages also have the advantage of lower interest rates compared to the original mortgage loan. They also come with a flexible payment plan that ensures that the borrower’s financial conditions do not deteriorate due to the loan. This, in a way, makes it more advantageous for a borrower to obtain a second mortgage for the purposes of expanding or modifying his or her home. Though current mortgage rates are low; the large sum of money required by the borrower to refinance the old loan and then, finance his or her project in most cases end up making mortgage refinance a not so helpful program for many borrowers.
In addition, the closing cost borrowers are expected to pay before a home loan is granted has been found to be an important factor that contributes to making the home loan very expensive for borrowers. Second mortgages in most cases do not require the borrower to pay any amount as closing cost. In the few instances where closing cost is required, the amount of money the borrower would have to pay has been found to be lesser than what is required to close a higher principal new loan.
Most mortgage lenders are not willing to give homeowners looking for second mortgage access to this mortgage unless they are sure that the homeowner is going to use the money profitably and most importantly, would be able to pay the loan back. This is especially the case when the lender that granted the second mortgage is not the same as the one holding the original mortgage.
This is because, the original mortgage always takes precedence over the second mortgage, so should mortgage default occurs, the needs of the original mortgage lender would have to be settled before that of the second mortgage lender will be considered.