A second mortgage is useful for those who want to renovate or expand their existing home. To what extent are people obliged to take out the second mortgage with the current mortgage provider? A second mortgage is only taken out if you have a valuation report. And finally the differences in a second mortgage, savings or a loan. The second mortgage is an extra loan that you take out for your home. So the collateral is the same. A second mortgage is taken out because you want to renovate or expand the home and need extra money for this. In this case, a second mortgage can be taken out so that the renovation can still be financed. Not everyone can simply take out a second mortgage. The condition is that it can be demonstrated that the house has increased in value. If there is excess value, a second mortgage is given in most cases. Overvalue arises because the house is worth more than what it was purchased for. The mortgage provider demands a surplus value of the home because the home serves as collateral: as soon as the mortgage can no longer be paid, the home comes into the possession of the mortgage provider and he can sell it. The remaining loan can then be paid off from the money that is released. The equity of the home is determined by means of an appraisal. A valuation can be done by a real estate agent or by a valuation agency. The value of the home is included in an appraisal report.
No home equity
Sometimes there is no equity at all, but people still want to take out a second mortgage. In this case, one must be able to demonstrate that the value will increase after the renovation. The mortgage provider will often not pay out the entire amount at once, but in parts. Part of the money is put into a construction fund. This will only be paid if the invoices for the renovation can be shown afterwards. So one must have proof that construction has actually taken place. The appraisal report must also state in advance what the expected surplus value of the home will be after the renovation. So you don’t just get a second mortgage, you really have to be able to demonstrate that you will put the second mortgage to good use.
Take out a second mortgage
You can decide for yourself where you will take out the second mortgage. But it will often be very difficult to obtain a second mortgage from a mortgage provider if the first mortgage is elsewhere. The problem lies in the collateral: when one can no longer repay the mortgage, the collateral is sold to pay off the current mortgage. The first mortgage always has priority, followed by the second mortgage, if there is still money left. That is why a mortgage lender who only gives a second mortgage could be fishing behind the net and whistling for their money. The interest on a second mortgage is often also slightly higher. This is due to the higher risk that the mortgage provider runs when the collateral has to be sold and there is no money left for the second mortgage. The mortgage provider wants to fill this gap due to the higher interest rates.
Second mortgage, loan or savings
Anyone who wants to renovate their home would be wise to take out a second mortgage. A personal loan or revolving credit has a higher interest rate and often only brings problems. Using savings is also not immediately recommended. Savings always provide something on hand in case of an emergency, such as a repair or a broken washing machine that needs to be replaced. Anyone who has a lot of savings and has enough left over after the renovation can always consider investing their savings in the home. But always stay alert that there is a pot left over for emergencies.
The most commonly used mortgage type for a second mortgage is the credit mortgage. This means that you can withdraw money again and again. There is of course a maximum limit, but you will not receive a large amount at once. The advantage is that people are not tempted to spend the money elsewhere and only withdraw money for the renovation.
Second mortgage as payment
Sometimes people take out a second mortgage to pay off current bills or to purchase a car. Although the banks have become stricter about this, it still happens. The question is to what extent this is advisable. A car depreciates very quickly in value while you still have to pay for it, and paying off current bills is often not a solution to the problem at hand. When bills cannot be paid, something will have to change drastically in spending patterns. Taking out a second mortgage for this only provides temporary relief: as soon as this money runs out, the bills will start piling up again. Therefore, tackle the problem at the root and do not treat the symptoms.