2nd Mortgage Quick-Tips
Watching these factors will help your 2nd mortgage be a success:
- The APR. Don’t take the first 2nd mortgage rate you see. Contact at least one bank, one credit union, and one dedicated mortgage lender about your 2nd mortgage (See How APR Works).
- Try to avoid 2nd mortgages with default penalties applied when you miss a payment or are late. We all think it won’t happen to us, but a clerical error can become very expensive. The interest rate on your 2nd mortgage could increase dramatically.
- If things change, you don’t want to pay a hefty prepayment penalty to get your 2nd mortgage off the books. Flexibility is important, so avoid locking yourself in.
- Beware of 2nd mortgages that are bundled in with voluntary insurance policies. While this coverage may be useful, you may or may not need it bundled into your 2nd mortgage. Furthermore, you may already have adequate coverage outside of the mortgage.
- Know about any balloon payments in the deal. Some 2nd mortgages start with low, easy-to-afford payments (at the cost of a huge payment at the end). Read the contract carefully to see if this is why a particular 2nd mortgage is so attractive.
2nd Mortgage Costs
Now, before you apply for a 2nd mortgage, prepare for and budget for the costs. In addition to committing to a monthly payment, you might have some up-front costs to get your 2nd mortgage processed.
- Appraisal fees for your 2nd mortgage
- Application costs for the 2nd mortgage, which may not be refundable if you’re declined!
- Other closing costs. For example, they may do a title search for your 2nd mortgage, along with other processes. Just ask for a printed list of these miscellaneous fees.
As with anything, sometimes you get what you pay for. I recommend using a reputable lender that you can trust for your 2nd mortgage, and one who will simply disclose all the costs. If you find a deal that sounds too good to be true, you’re probably missing something in the fine print.
For an introductory overview of 2nd mortgages, visit our page on Advantages and Disadvantages of 2nd Mortgages.