5 Tips on Getting a Second Mortgage

A second mortgage allows homeowners to tap into their home equity and receive much-needed cash. A second mortgage is known as a secured loan, because it requires borrowers to put their home up as collateral for the loan. Borrowers can use the extra money to pay for home renovations, student loans, medical bills, or basic living expenses. Since the interest rate of a second mortgage is lower than most consumer loans or credit cards, many borrowers also use a second mortgage to consolidate debt.

Understand Potential Consequences

A second mortgage is a great way to borrow extra cash at a reasonably low, tax deductible interest rate. This type of loan is not for everyone, however. If you have a history of making late payments, or if your employment or income is subject to change for the worse, a second mortgage may not be for you. If you fail to repay your second mortgage, the lender will likely foreclose on your home to regain the amount you borrowed.

Establish the Amount You Can Borrow

To establish the potential amount of your second mortgage, simply subtract the current balance of your mortgage from your home's current market value. Lenders will also consider your employment status when establishing a maximum loan value.

Determine Your Goals

When speaking with your qualified mortgage lender, be sure to assess your overall financial goals, monthly budget, spending habits, and the amount of time you plan to live in your current home. If you plan to move from your home in the next few years, taking out a second mortgage may not be your best option. Instead, you may want to consider loan modification of your first mortgage, which will lower your monthly home loan payment. Speak with your lender about which option is right for your lifestyle and your budget.

Decide on the Type of Second Mortgage You Want

There are two main types of second mortgages: a home equity loan and a home equity line of credit. A home equity loan is a onetime payout for borrowers needing a lump sum of cash. A home equity loan usually has a fixed interest rate. With this type of second mortgage, it's important to not borrow more than you need, since you're paying interest on the entire loan amount.

A home equity line of credit, on the other hand, allows borrowers to take out money numerous times over the life of the loan, until you've reached your spending limit. A home equity line of credit has an adjustable interest rate that is subject to increase or decrease according to market conditions. A line of credit is a good option for homeowners who must sporadically borrow money to pay for expenses. Another benefit is that you just pay interest on the amount you borrow, not the entire loan.

Negotiate Fees with your Lender

Though a second mortgage can offer borrows additional cash, these loans can include several closing costs and fees, including an appraisal fee. Due to tough competition, however, lenders often eliminate or reduce certain second mortgage fees. Speak with your lender to find out if you can negotiate any fees. Also be sure to ask if there is a prepayment penalty.


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