Second Mortgage: How Does it Work? | Mango Credit & Mango Mortgages
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WHY YOU MIGHT CONSIDER A SHORT-TERM SECOND MORTGAGE
Let’s look at short-term second mortgages – what they are, the benefits of using them and common scenarios where they make sense when you need quick access to funds for up to 12 months.
What is a second mortgage?
It is exactly as it sounds – a second mortgage loan that is secured against your property when you already have a primary loan (or first mortgage). A second mortgage is ranked below the first mortgage so that in the event of a foreclosure, the first mortgage is paid back as a priority (then the second mortgage is paid from the balance of funds). This increases the risk for the second mortgage lender. As such, lending criteria for a second mortgage is often quite strict and there’s typically a fair amount of scrutiny in the application process. To even consider a second mortgage, you need solid equity in your property given the Loan-to-Value (LVR) ratio needs to include the total of both loans to meet the borrowing criteria for second mortgage lenders in Australia.
As might be expected, many people consider their homes as their most valuable asset. And in most cases, home properties are often used by homeowners as collateral to get the needed financing. Although you can use your home as collateral, the problem comes in when you are still paying for the mortgage of your home.
Fortunately, this is where a second mortgage comes into play. In the event where you need financing, you can use a second mortgage to fund anything, from home projects to your child's education or to invest in the expansion of your business. Thus, getting a second mortgage can be a financial saviour in times of emergency. The question is, which second mortgage best suits your needs?
We, at Mango Credit & Mango Mortgages, provide a fair, reliable and trustworthy service. Our lending specialists are readily available to guide you in the essentials of applying for a second mortgage. Get in touch with us today.
What Is a Second Mortgage and How Does It Work?
The second mortgage is a loan made in addition to the homeowner's primary mortgage and has a higher interest than the first mortgage. Typically, borrowers prefer this type of loan because they are given access to finance without having to sell their home properties.
When you take on a second mortgage, you borrow using your home's equity value. The higher the value of your equity is, the higher the amount that you can get from your loan. For instance, if you have a home that has a value of $300,000, and the balance of your first mortgage is $80,000, the value of your equity is $220,000. If you have a good credit score, you can borrow up to 85% of your equity. Hence, your possible loan amount is $187,000.
When you decide to take advantage of a second mortgage, check on the following steps you might need to do:
Choose your credit company.
You need to find a lender company that really understands your needs and has the expertise in dealing with the process, payment terms, the pros and cons and any financial complications.
Submit your loan application.
After choosing your lender, you can proceed with applying for the loan. This includes applying and submitting the necessary documents to the lender, including your home's valuation. You also need to submit your personal financial information so that your lender can determine if you qualify for such an application.
Know the fees.
Similar to the first mortgage, the second mortgage has specific payment terms. Depending on the agreement between you and the lender, there can also be a fixed interest rate added.
Types of Second Mortgage
As a potential borrower, you can choose from the two types of second mortgages.
Home Equity Loan
This type of loan provides the borrower with a lump sum of money that can be used for whatever purpose he has in mind. It has fixed monthly payments at a fixed rate that must be paid within a certain timeframe, usually 5-30 years, depending on your agreement with your credit company. With each payment you deliver to your lending company, you pay a fraction of the interest, as well as the loan balance.
Home Equity Line of Credit
In this type of loan, the borrower will not get a fixed amount of money but will be provided with a line of credit, meaning the borrower can withdraw funds anytime. This is similar to how a credit card works but is secured with your home as collateral. A line of credit also gives you flexibility as a borrower. As long as the withdrawal does not exceed the maximum limit of available equity, reborrowing is allowed.
Advantages of Second Mortgage
Like any other loan, a second mortgage has its own advantages.
You can get high loan amounts.
Too often, lending companies offer a high amount of loan from your equity. They also let you access finance even with an existing loan because your loan is secured against the price of your home.
A second mortgage has lower interest rates than credit cards.
Given that a second mortgage is a secured debt, lenders often provide lower interest rates compared to credit cards. Again, this is possible because you are using your home as collateral for your loan, which reduces the lender's risk of losing money.
You can use the funds without restrictions.
The good thing about a second mortgage is that you can use your money in any financial transaction that you might have. It could be for an emergency, home improvement projects, child education support and travel. There is no rule on how you should use your fund; you have complete control over your finances.
A second mortgage enables you to consolidate debts.
You can reduce interest payments on your first mortgage by obtaining a second mortgage. Also, when you are paying high-interest rate debts, such as credit cards, applying for this type of loan is a great option. Homeowners who have enough equity in their property can use the fund to consolidate the debts into one payment system rather than paying interest from several loans. Hence, in the long run, you simplify your finances and save yourself from the hassle and inconvenience of paying several interests.
It's easy cash.
You can easily access a lump sum through a second mortgage.
A second mortgage has an easy application process.
Because you are using your home as collateral, your chance of getting approved is high. This is often a good alternative compared to applying for unsecured loans, such as personal loans. Most lending companies also have innovative loan structures that allow for flexible payment terms.
Things to Consider When Applying for a Second Mortgage
Despite the many benefits associated with a second mortgage, it is still wise to consider the following before applying for one.
Do your research in finding the right credit company.
The best way to be at peace with your decision on getting a second mortgage is to do thorough research on the lending companies that are in your area. This is important because you would not want to end up making mistakes or letting your funds out of control.
To help you choose the lending company that can provide you with more strategies, payment options and flexible rates, check on their service records, client testimonials, and even their policies.
Be aware of the existing fees.
As part of the policy, certain fees must be paid when applying for a loan, and the amount differs from one credit company to the other. Depending on your lender, you might pay for interest rates, settlement fees, valuation fees and establishment fees.
Consult with a home loan expert.
Getting a loan is a serious transaction, and sometimes, without proper guidance, you will end up being on the wrong side. It is, therefore, crucial that you discuss your case with a loan expert.
The upside of short term second mortages include:
- Cheaper than a caveat
- Higher LVR’s available than a caveat
- Enables the fast release of funds from your existing property for business or personal purposes
- Take advantage of time sensitive opportunities
- Opportunity cost (i.e. the cost of missing out on funding is more than the cost of the loan)
Are you looking for a highly qualified lending company?
Our loan specialists are experienced. To enquire about a second mortgage, email us at info@mangocredit.com.au or call us at (02) 9555 7073.