If you find yourself struggling to pay your monthly bills, or if you are suddenly swamped with a lot of medical expenses and other costs, you might consider taking out a second mortgage on your home. Many people choose to take out a second mortgage when dealing with home renovations, financial difficulties, or just the need for some extra cash. A second mortgage will allow you to use the equity in your home for whatever financial needs you may have. If you have a home that is worth $300,000 and your mortgage balance is $225,000, you have up to $75,000 in equity for your home. When you take out a second mortgage loan, a lien is applied against the home, allowing the bank to receive proceeds from the sale of your home if you end up defaulting on the loan.
Types of Second Mortgage Loans
When you are considering the loan, you have two options: the home equity loan or a home equity line of credit. The loan gives you a large sum of money that you will repay over a fixed period of time. A line of credit is similar to the way a credit card works: you are given a limit that you can reuse as you pay off the balance of the loan.
Using a Loan
Consider what your need is for the loan and compare interest rates to determine which is the right loan for your situation. If you are trying to use the loan to pay off credit card debt, you should think carefully about a second mortgage, as you will end up paying for that debt for 15 to 30 years. Would it be faster to pay off the credit cards alone? When you take out a second mortgage, you must consider how it will impact your finances. Can you afford the new payment? Do you have a steady job that will allow you to pay back the money you borrow? If you do acquire a loan, you will need to have additional costs added to the loan, such as home appraisal fees, annual fees, and closing costs. A second mortgage normally comes with a higher interest rate than what you will pay on your first mortgage. You will need to pay all the fees to close the loan as well. However, taking out a second mortgage is typically cheaper than getting a new mortgage on your home, as you end up paying a penalty to close out the loan even if you are trying to get a lower interest rate.
Applying for a Loan
Acquiring a second mortgage is not as easy as it used to be. Since many people defaulted on their loans in the late 2000s, banks have increased their standards related to lending money. You need to have good credit to qualify for a second mortgage, and the bank needs to make sure you can afford what you borrow. Check your credit rating and your debt-to-income ratio to see where you currently are. Are you a risk to the lender? It is important to talk to your current lender and compare their rates with other lenders. You need to make sure you are able to get the best rates and loan terms for your situation.
Werner Brandenburg writes on real estate, finance, economics, property law, renters insurance and other like topics. Renters looking for adequate protection should consider the renters insurance from Protect Your Bubble.
Image credit goes to mortgagebrokersouthampton.