A second mortgage loan is a subsequent loan and subordinate to the earlier mortgage. In other words, a second mortgage loan is used as collateral pledged for the first loan.
Length of Second Mortgage Loans
Second mortgage loans have varying lengths with which they are eventually paid off. Some second mortgage loans may last for as long as 15 or 20 years. Other second mortgage loans only require one year for repayment.
When you’re thinking of taking on a second mortgage loan, you will need to know what term best suits you. Discuss the repayment terms of the second mortgage loan with your bank or lending company. For instance, you get a second mortgage loan worth $20,000 to make some home repairs. With this amount, you might want to take on a second mortgage loan that will allow you to repay the entire amount in one or two years. If you pay a second mortgage loan that has a shorter term, the monthly payments may be too high.
Payment Calculations for Second Mortgage Loans
Before taking on second mortgage loan, be sure that you understand a couple of things first. Know how much your monthly payments will be for that second mortgage loan. Moreover, it is also helpful if you also have an idea as to where those second mortgage loan payments will cover.
Some second mortgage loans require you to make monthly payments on both interest and principal. Other second mortgage loans only require you to pay the interest of the borrowed amount.
The former type of second mortgage loans will allow you to significantly shorten your payoff period since with each payment you make, you are also chipping away at the principal. With the interest-only second mortgage loan however you will be required to pay back the entire amount that you borrowed as soon as the term ends. This type of second mortgage loan is also called balloon payment loans.
Second Mortgage Loan Costs
Fees may be charged by some lending companies for the money you borrow on second mortgage loans. The fees, referred to as “points,” are usually a percentage of the second mortgage loan. One point on your second mortgage loan is equivalent to one percent of the amount you borrow.
So, if you were to get a second mortgage loan of $10,000 with an eight-point fee, then you would have to pay $800 in “points.” Second mortgage loan companies may charge you in varying number of points so if it might be helpful if you do a comparison first.
Second Mortgage Loan Rates
Second mortgage loans have different payments plans. Most second mortgage loans have a fixed rate payment included in their payment plans. If you have a fixed rate second mortgage loan, the interest rate will be set for the whole loan term. This means that your monthly payments for your second mortgage loan will not be affected by any outside changes.
Some companies also offer second mortgage loans with variable rate payments. These variable rate second mortgage loans periodically experience rate adjustments. A variable rate second mortgage loan might be cheaper than a fixed rate payment in the long run. But this is only provided if the interest rates of second mortgage loans go down. If interest rates rise, then your monthly payments for your second mortgage loan will rise as well.