How to Get the Best Second Mortgage Rates

In many cases of home loans, the second mortgage rates are almost always higher than interest rates for first mortgages. This is because second mortgage loans carry more risk for the lender as they are placed second in priority on the property’s title in case of non-payment. This means that if there is failure to pay any payment arrangement that the borrower makes is first applied on the first mortgage before any amount can be paid out to the second loan.

A second mortgage is an additional loan made against the same property used for the first mortgage. The amount of the second mortgage loan is usually computed based on the equity of the home.  A home’s equity is equivalent to the appraised value of the home minus how much mortgage is still left to be paid off.

Getting a second mortgage is one of the best way for homeowners to obtain additional funds without needing to refinance their first mortgage. It can be very useful to help finance other major projects such as:

•          To consolidate high interest debt and pay it off into one low interest rate every month

•          To finance a home renovation or home improvement

•          To use as capital to start a small business

•          To help pay for college education

Second mortgage loans are very popular in the private mortgage market, but not everyone can easily qualify. Private lenders are careful of the risks they are taking in these types of loans so they take extra steps to evaluate a borrower’s personal and financial situation.

Lenders will look at four areas to determine if a borrower is eligible:

1.         How much equity do you have? The standard rule is that you must have over 20% of equity in your home to qualify for a second loan mortgage. However, the higher the amount of equity your property has, the better your chances of getting approved for a second loan.

2.         How much income do you earn? Lenders will look at how much income you earn and how much debt you are paying off to determine if you are able to make monthly payments on your second mortgage without exceeding your Total Debt Service Ratio (TDS). They’ll also look at your employment status and the length of time you’ve been with your employer, to make certain you have a dependable source of income and can make steady payments on your loan.

3.         How much is your credit score? Your credit score is needed to determine the interest rate for the second mortgage. Generally, a high credit score is given a lower interest rate. If you have a low credit score, you can still be eligible for a second mortgage but will likely be charged a higher interest rate.

4.         Is your property secure? This makes a second mortgage a secure loan because lenders will take your property as security in case you default on payments. Make sure there are no issues tied to your property as the smallest detail could cost you the loan altogether.

Most homeowners find the best second mortgage rates with the help of a mortgage broker. Working with a mortgage broker can help make the whole process of getting a second mortgage stress free for you. He can help you shop around with different lenders and get you the best possible rates that meet your needs.