A second mortgage is usually a lien that has been granted as a subordinate to the original, bigger loan. If you are a lender, it is understandable that a granted a second mortgage is much more risky for you. Simply, there is a greater chance of borrowers defaulting on a second mortgage. If there are two mortgages, the first, bigger one has to be paid off earlier.
A second mortgage can be paid off in two ways. It can be in the form of a structured amount, which has to be paid off within a specified time. On the other hand, the borrower can even choose to bill it as a credit card system, thus giving the borrower the option to pay less than the specified interest each month.
As a moneylender, you should look into the following aspects, when deciding on providing your borrower a second mortgage or not:
- Credit Score
- Debt-to-Income Ratio
- Employment history
- Equity of the first mortgage
If anyone of these aspects has a fault in them, you should reconsider loaning them a second mortgage, as it is more than likely that they will default on the payments.
Uses of a Second Mortgage
Borrowers can ask for a second mortgage for a variety of reasons. Naturally, no one applies for a second mortgage unless they are in dire straits. The main uses for a second mortgage include:
- Emergency home renovations or repair
- Debt Consolidation
- Increase intuition for College
As a lender, you can ask what the money will be used for.