By Harris Fallon
A 2nd mortgage loan allows a homeowner access to the equity in his home. This is the appraised value of the property less the amount of the first mortgage. Traditionally, second mortgage loans were used to finance improvements.
Homeowners might remodel the kitchen, add a deck or finished the basement to provide a family room or home theater. The equity was used to send students to college or to provide startup capital for a small business. The second loan for most homeowners was a one-time loan meant to cover a specific purpose.
Twenty years ago only the most credit worthy individuals could qualify for a second mortgage that, when added to the first mortgage, would total more than 80% of a home's value.
When mortgage interest rates declined in the early 2000s, second mortgages became more common. A contributing factor was the housing bubble that caused home prices to rise by double digits annually in many parts of the country.
Large financial institutions began to ease the underwriting restrictions on second mortgages in the 1990's and by 2001 a homeowner could leverage 100% of the value of his home with a second mortgage loan.
The low interest rates were attractive to homeowners. It has been common for those living above their means to consolidate their debt with a second mortgage on their home by refinancing the second mortgage year after year.
In the past, a 2nd mortgage could be expected to be at a higher rate of interest than the first mortgage on a property. Variable rate second mortgage liens were offered with initial interest rates as low as 3%. Some homeowners began to use the equity in their home as a mini-bank.
They would take a 10 year second mortgage to pay off credit card debt and their monthly payments on the new loan would be substantially less than the payments made on the high interest credit cards.
However, it is important to realize that when you take a second mortgage loan on your personal residence, you are in a position of increased risk. Almost all second mortgage loans have a cross default policy.
That means failure to pay the second loan will cause the first mortgage to go into default and you may lose the home through foreclosure. In the current economy, the rapid decline in home values has meant thousands of homeowners now have first and second mortgages that are much higher than the market value of their home.
Equity in your home is like have emergency cash in a bank account. Homeowners who treat the cash generated by such a loan as an excuse for a shopping spree may find themselves struggling to keep their home.
Used wisely, a second mortgage loan is an option available to pay for medical expenses, college tuition, or to improve your property. Used unwisely, homeowners may find themselves facing the loss of their home altogether. As such, you should weigh the extra cash that you generate with the extra risk you will take on before deciding to take on a second mortgage for your home.
Harris Fallon is a Virginia based homeowner who frequently writes about mortgage loans and real estate financing for residential properties. You can read more about Virginia 2nd mortgage loans, financing tips and homeowner considerations at http://www.virginia2ndmortgage.org.
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