When it comes to second mortgages, you probably fall into one of two camps. The first sees refinancing their homes as a terrifying financial prospect. The second sees a unique opportunity, which presents plenty of benefits in the right circumstances.
Second, or even third, mortgages will work to your advantage in certain situations. Like all forms of credit, you’re probably going to need a decent credit score to get your hands on one. However, if yours is less than perfect but you still want to maximize the credit you can obtain against your property’s value, hard money and private money loans may keep you in the second mortgage game.
Before you begin searching for potential lenders, it’s worth understanding how hard money and private money second mortgages work. Once you have a bit of background knowledge, you can dive into the best ways to get your hands on one.
What Are Second and Third Mortgages Exactly?
Just as the names suggest, they are additional mortgages that you take out against your current property. Sometimes they appear under different names, such as home equity loans and junior liens. In all cases, they’re an extra source of credit when you’re in need of cash.
When Will a Second Mortgage Work in Your Favor?
Yes, you’re adding to your debt burden; and yes, failing to repay your second mortgage increases your risk of losing your property. However, many people who are quick to cite those facts will also overlook the scenarios where your second mortgage makes perfect financial sense. For example:
- You want to consolidate existing debts, such as credit cards, store cards, and loans. In such situations, a debt consolidation loan might come with a higher interest rate than your second mortgage. As a result, taking out extra credit against your property may very likely save you money.
- You need to acquire funds for a down payment for a new property you’re itching to invest in, but you don’t want to shoulder the costs of private mortgage insurance. If the second property you buy turns a profit, your private money second mortgage is seriously worthwhile.
- If you want to step away from GSE loan limits while you expand your property portfolio, your second mortgage allows you to access extra cash without the high-interest rates that accompany jumbo loans. Whether or not you achieve this with a hard money second mortgage will depend on where you secure your finance.
- You are a business owner or real estate investor with a new opportunity on the horizon, you may want to access the equity in your primary residence using either a hard money second mortgage in the form of a closed-end loan of 60-240 months or a hard money Home Equity Line of Credit (HELOC) to take capitalize on the opportunity.
When Would You Need a Hard Money Second Mortgage, and Are They Worth It?
As the economy strengthens, the number of hard money and private money second mortgages is rising. Generally, your FICO score doesn’t need to carry the same level of excellence compared to when you try to take out another mortgage the traditional way. Your score will still play a role in determining your loan terms, but choosing the private money and hard money route still broadens your options.
Unlike traditional second mortgages, those that come from private money lenders don’t depend on financial institutions featuring strict regulations. You’ll still need to demonstrate your ability to make repayments, but you may find that hard money second and third mortgages are easier to access. Although they often come with higher interest rates, the person or institution lending to you sees a financial opportunity and may be able to offer flexible payment plans that complement your interests. As a result, securing additional credit in the form of a second or third mortgage may be more conducive to your investment plans than choosing a rigid business loan.
Why Should I Use a Hard Money Mortgage Broker?
Although it’s possible to try and source private money second mortgages alone, doing so comes with the risk of missing out on the best opportunities. When you use a broker, you’re gaining access to their network. Additionally, they can assess whether a hard money second mortgage will meet your requirements and find an investor you’ll work well with.
If the traditional approach to a second mortgage isn’t open to you, consider private money instead. With the right advice, you can identify whether using one will work in your favor and possibly open yourself up to a fresh source of cash. Wondering if a second mortgage is right for you? First Capital Trust Deeds can help you explore your financing options.