If you find you need a source of extra income, the equity you have in your home could be the solution. A second mortgage will release some of the money you’ve put into your home when you need it the most, but there are some negatives to consider. There are some common mortgage questions to ask prior to obtaining a mortgage.
We’ll review the five things you need to know about second mortgages before you decide to apply to a lender.
Understanding Second Mortgages
If you have had a mortgage on your property for a few years, you will have built up some equity. When you take out a second mortgage, this accumulated value will be used as collateral to get the loan.
A lien will be put on the home by the lender for the amount of the second mortgage. The lender’s lien will remain on your property until you have paid off the mortgage with them. It gives the lender the possibility of taking your home should you fail to stick to the payment schedule. There are mortgage terms that are utilized so it is important to understand them.
How to Increase the Equity in Your Home
Simply by paying your mortgage each month, you are paying down the loan and increasing your equity. Some of your monthly payment will go towards the interest and isn’t adding to your equity in the property, however.
Also, the market conditions in your area can increase your equity. When house prices rise you will increase your equity, but they can also fall cutting the equity you have. By making improvements to the home, you can also increase its value, increasing your equity.
By making certain home improvements, that will also increase the equity in your home. Other ways to increase equity include updating the home with renovations that are a good return on investment.
There are certain landscaping improvements that will increase property value such as a built-in outdoor kitchen or adding hardscape.
How Does a Second Mortgage Work in Practice?
Before you are approved for a mortgage, the value of the home will have to be assessed.. Typically, however, you won’t be able to use all of the equity you have in the home. Normally lenders require that 20% equity is left in the home, so you need to consider that before you look at getting a second mortgage.
If the assessor finds that your home is worth enough to make getting a second mortgage worthwhile, you could apply for a second home loan. Though if you get approved, you do have to remember you’ll have two mortgage payments to make each month.
There are a couple of different types of second mortgage available; home equity loans, and home equity lines of credit. A home equity loan will give you a lump sum, and with a line of credit, you will get an amount of money that you can draw upon when you need it. A home equity line of credit is still a lien on the deed of trust regardless if you have used it or not.
The Advantages and Disadvantages of a Second Mortgage
Before you decide to apply for this type of home loan, you need to consider the pros and cons and how they will affect you.
Second Mortgage Advantages
Typically you can expect to pay less in interest on a second mortgage than other types of lending. The interest you pay on your second home loan will probably be lower than credit cards or personal loans.
You can get a larger loan with a second mortgage. This does depend on the amount of equity you have in your property, however.
Some types of loans will be for a particular purpose, like renovating your property. With a second mortgage, you don’t face any of these restrictions and can do what you like with the money. It is a good idea to pay off the additional debt to avoid accumulating too many credit cards or other debt.
Second Mortgage Disadvantages
Two mortgage payments
Being approved for a second loan means that you will have two mortgages to pay. You need to be ready to cover the additional monthly costs that this will involve.
Refinancing could be better
Often refinancing will give you a lower interest rate than a second loan. The second lender is likely to charge you higher interest because there is a greater risk for them.
Alternatives to a Second Mortgage
Refinancing a mortgage is something you certainly want to consider if the idea of a second loan is attractive. Refinancing your mortgage could get you better terms and less interest to pay.
When you refinance, you have the option of a cash-out mortgage. While this will increase your home loan, it will also give you a lump sum to use. If you get a lower interest rate when refinancing, your monthly payments may not increase much at all. And depending upon the interest rate, your payment may even be less than what you are currently paying for your first mortgage.
Is a Second Mortgage Right for You?
If you have other loans, like credit card debts, a second loan might work out better for you. But you should also check that refinancing isn’t an even better option that will save you a lot of money on the loan.
Getting this type of loan may be the right decision, however, make sure that the interest rate that you are getting an acceptable interest rate. You also want to be sure that you can comfortably pay the mortgage payments. You don’t want to have a second mortgage payment that will sap your savings and wealth. Having a second payment will be an additional expense with the costs of homeownership.
About the Author
Top Newport Beach Realtor Sharon Paxson has written the real estate article “Five Important Facts to Know About a Second Mortgage”. With experience since 2005 representing sellers, buyers, and landlords with their real estate transactions, we welcome the opportunity to share our knowledge and expertise and guide you through the home buying or selling process.