A double mortgage is often referred to as “second mortgage” or HELOC (Home Equity Lines of Credit). This is an instance that lets you take another loan based on the value of your home. Residential real estates are assets that gain value over time. When you avail of a double mortgage, this is a way of putting your asset on another project, or goal.
For example, you bought a house that is worth $100,000. You pay a $10,000 down payment. The value of your first mortgage is now $90,000.
Let’s say your home’s value has increased to $150,000, and you want to get some money out of your home because it has more worth. You will then apply for a second mortgage (or double mortgage). For a second mortgage, lenders can only let you have up to 20% of the value of your home. So in the example, you can take home maximum $30,000 loan.
History
Back in 1990’s, it was so easy to get approved for a double mortgage. Many individuals got second mortgages for them to purchase another home. They were also pertained to as piggyback loans where their investment consists of 20% second mortgage and 80% first mortgage.
Well, that was a long time ago, but that doesn’t mean no one can get a second mortgage anymore. If you want to get a second mortgage, it is important to remember that lenders will make sure that your existing home has an equity before approving you for a double mortgage. This is because they want more security after the real estate market crashed in 2008.
Why Someone Would Want a Second Mortgage?
- It can be more convenient regarding the repayment schedule.
- It can have a smaller interest compared to refinancing.
- It can be easier to obtain a second mortgage than apply for another loan because it does not require an upfront money
During your application, the lender will ask you how you will use the second mortgage. If the lender likes your reason, they might approve your application (as with Chase Bank for example).
Many home-owners are privileged to have the chance to get a second mortgage, but it is wise to use this loan to increase the value of your home. Here are some ways you can use your loan:
- Improve your home and sell it for a higher price.
- To avoid PMI (private mortgage insurance).
- To pay for education. This is risky, however, because you could face foreclosure. Try looking for student loans with better deals.
- To consolidate debts.
Different Ways To Obtain Your Second Mortgage
Line of Credit
This is a pool of money that you can withdraw money from, whenever you want. This type of loan gives you a maximum amount of money that you can borrow. You can take loans multiple times until you reach your borrowing limit. This is similar to having a credit card where you can pay your loan, and then borrow again.
Lump Sum
This type is a one-time loan that gives you all the full amount of money you can borrow, and use it however you want. For this kind of loan, you will have a fixed monthly payment that you can pay gradually. The monthly payment consists of a part of your loan balance plus a portion of the interest (also known as amortization).
Your loan may come with a fixed interest rates. However, it is typical for a line of credit loans to have variable rate loans options.
Advantage and Disadvantages of Double Mortgage
Advantages
Double mortgages allow you to borrow large amounts of money because you are getting a loan that is in your home – which is worth more. Aside from that, a second mortgage has lower interest rate compared to other loans. This is because lenders are more comfortable lending you money when the loan is secured by your asset – which is your home.
Disadvantages
Any loans should be used wisely. Approval of a double mortgage can put your home at risk of foreclosure. When you stop paying your lender, they will be able to take your home. This is the reason why it is not wise to avail of the double mortgage for entertainment or daily expenses.
Like other loans, you have to pay for interest fee, although this is lower than credit card interest, it is still higher than the first mortgage interest.
If you are deciding on getting a double mortgage, you can make the process easier by preparing your documents earlier and getting your money in the right place.
