Second Mortgage Rate Factors

Many homeowners can benefit from taking on a second mortgage.  Some need the extra cash to fix up a second property or help their kid pay for college, while others just want to lower their payments.  Applying for a second mortgage is similar to applying for a first mortgage.  However, interest rates are determined a little bit differently. So if you’re looking to take on another home loan, read on to figure out how different factors can affect your rates.

The Basics

A second mortgage is a loan taken on a property that you already own—common examples arehome equity loans and home equity lines of credit.  A second mortgage is secured by your property, meaning you’ll lose your property if you don’t pay the loan back.  Interest rates on second mortgages are usually higher than those on the initial mortgage. That’s because if a default happens, your first mortgage lender is the first one to be fully repaid. Only after the initial lender is reimbursed does the second lender get repaid from whatever remains.

Market Conditions

Mortgage rates are inextricably tied to market conditions at the time you are seeking a loan. Sometimes the Federal Reserve boosts commerce by lowering the prime interest rate whenever the economy slows down in order to entice home buyers (known as quantitative easing).  Basically, interest rates rise in a flush economy and fall in a sluggish one. This axiom holds true for both first and second mortgages.

Lender Policies

Each lender sets its own policy. A lender can choose to attract customers by offering a lower interest rate but take less profit on the loan. Other lenders might choose to offer higher interest rates but give more flexibility with repayment time frames.  Therefore, it’s important to shop around. Start with the lender of your first mortgage and then try local neighborhood banks, online lenders, and big banks. Do a true cost comparison of interest rates before signing for a second mortgage.

Loan Structure

Like first loans, interest rates on second loans are dependent on the loan’s terms. This includes whether the interest rates are fixed or variable and the loan’s length. Interest rates on a 30-year fixed-rate loan will be different from those on a five-year adjustable-rate loan.  When you are shopping for a mortgage and comparing rates among lenders, make sure that you are comparing interest rates on loans with comparable terms.

Special Offers

Lenders want your business. To compete, they might offer special terms. Some of these offers can be great deals. For example, a lender might offer a very low interest rate for the first year, after which the rate jumps up by several points, which can be good for people who aim to get that second loan paid off quickly or look to sell soon.

Your Credit History

Like a first loan, your credit history affects interest rates on your second mortgage. If your credit has taken a beating since your first mortgage, you might not even qualify for a loan. If your score dropped too much, expect higher rates.  In contrast, if you have a good credit score and a healthy loan repayment history, you can probably negotiate with lenders to receive a lower interest rate. However, it’s unlikely your second mortgage rates will be less than the first.

-From Realtor.com