31-Dec-21 Most homeowners who borrow money to buy a home or an investment property will take a first mortgage. But apart from your first home equity loan, there are other reasons you might have to borrow additional funds, and these include financing a few home improvements or consolidating your debt. And thats where taking a second mortgage comes into play.
Accordingly, if youre considering taking a second mortgage or home equity loan, this article will cover what you need to know about what a second mortgage is and when it makes sense to get one.
What is a second mortgage?
A second mortgage is a loan that uses the equity in your house as collateral. The equity in your house is the percentage of its resale worth that you own entirely. Hence, second mortgages are also considered as home equity loans. That said, your equity begins with your down payment after you fund your home with a mortgage loan, and you gain more equity with each payment up until the final price leads to 100 percent equity. On the other hand, if you stop making payments, youll lose your home because its collateral.
Furthermore, regarding the home equity line requirements, youll usually need about 20 percent equity on your house to qualify for a second mortgage. The lender will get an appraisal, that youll have to pay for, to determine the homes market value.
Types of second mortgages
Home equity loan
With a home equity loan, youll return the lump sum you borrow in a progression of equal monthly installments over a repayment period. Its important to note that you can use this type of second mortgage for a particular costly expense, such as significant house renovation or a roof replacement. The cost is fixed and declared, and you use the loan amount to cover it entirely.
Home Equity Line of Credit (HELOC)
Home equity line of credit works like credit cards, but its secured with your home equity. With HELOC as your second mortgage, you get a set credit limit that enables you to borrow money as much as you need. Also, its important to note that although you can use this type of second mortgage for any purpose, it would be better to get one if you have significant cash needs like a complete home renovation or college tuition.
When should you get a second mortgage?
When you need additional cash to purchase a home
Its preferable to get a second mortgage if you plan to buy a new home before your present house sells. Getting the timing right when selling your current house to potential buyers, to buy a new home, can be challenging because home buyers are also looking to meet their own best interests. For instance, if youre a homeowner in Chicago, Chicago home buyers are looking for lower mortgage rates.
Therefore, if you need to purchase a new home before finalizing the sale of your present home, you can consider getting a first mortgage and a second one that covers the profit youre anticipating from your current home.
Then you can settle the second mortgage with the sale profit when a home buyer buys the house youre selling.
When you want to tap into more home equity
Even if youre satisfied with your first mortgage, you can still convert some home equity when you want to do so in the foreseeable future. You can use the funds to pay for college tuition, your credit card debt, or use it as a financial cushion for unexpected expenses in the future.
When you need to make home improvements
Another best time to get a second mortgage is when you plan to perform a significant home renovation, such as adding a new bedroom or putting in a new kitchen. There may be tax-deductible mortgage interest with a second mortgage if the finance is for home improvements.
When you plan to refinance and bypass mortgage insurance
If you borrow above 80 percent of your homes value, youre required to have mortgage insurance on a first mortgage. The good thing is that, with a second mortgage, lenders allow borrowers to take up to 100 percent of their homes value on a mortgage refinance without getting mortgage insurance.
When you plan to borrow more equity
You should consider a second mortgage if youre planning to borrow more equity instead of taking a cash-out refinance. Cash-out refinancing happens when you take out your first home equity loan more than you presently owe and get the difference in cash. Most first home loan, cash-out mortgage-refinancing options allow individuals to borrow around 80 percent of their homes value. But on the flip side, second mortgage loans let some customers borrow up to 100 percent of their homes value.
If youre considering getting a second mortgage, its advisable to learn about all its requirements and talk with a mortgage broker or banker to find out whether you qualify for it. Its worth noting, too, that using additional money that a second mortgage provides means taking on further debt. So, make sure to consider the cost of borrowing carefully.