Wondering what a second mortgage is, and whether or not one can help you?
People have used second mortgages for everything from getting out of debt to even avoiding bankruptcy. Used wisely, this tool can help you take control of your finances without affecting your home or quality of life. However, you probably have some questions if you’ve never given a second mortgage a shot before.
In this guide, we’ll answer all of your second mortgage FAQs so you can make an informed decision and become debt free. Keep reading to learn how it works!
What is a Second Mortgage?
Before you can truly understand a second mortgage, you’ll need to brush up on your home equity knowledge – so let’s take a look at that first.
How Home Equity Works
Until your mortgage is completely paid off, you don’t technically own your home. That is, you don’t own all of it – you own a part, equal to how much of your mortgage you’ve paid off already. Home equity refers to that portion of your home that you’ve already paid for.
It’s not hard to find out how much home equity you have. Just use a mortgage calculator to subtract the amount of your mortgage from your home’s market value.
For example, if your home has a value of $250,000, and you still owe $150,000 on the mortgage, your equity is $150,000 subtracted from $250,000. This gives you $100,000 in home equity – but that number’s subject to change with the market value of your home.
Market value usually changes with time, so your equity will too.
Home Equity and Second Mortgages
Some people have realized that their home equity represents funds that they can borrow against and use for education, starting a business, and more. That’s where the second mortgage comes from.
Lenders saw the opportunity in this, as well, and second mortgage opportunities grew from there. You can borrow against your equity and pay it back with interest – although if you fail to pay it back, your house is on the line.
Second mortgages work just like a first mortgage or any other kind of debt. You can use the funds for all sorts of things, as long as you pay them back plus interest. Since second mortgages are secured by your home, some people find them scary. But used correctly, they can help you get out of debt with no added trouble.
The Types of Second Mortgages
There are two major types of second mortgages. You can choose to either get the funds in a lump sum with a home equity loan or use a Home Equity Line of Credit to draw from. Let’s take a look at the differences between the two.
1. Home Equity Loan
When you get a home equity loan, the lender gives you funds based on your home’s equity all at once. You repay them every month, after getting the lump sum. There’s a fixed interest rate, so you’ll always know what your monthly payments will be.
2. Home Equity Line of Credit
The HELOC is when your lender pre-approves a significant amount of your equity for you to borrow from. You don’t get these funds as a lump sum – instead, you’ll just take out what you need when you need it.
HELOCs function kind of like credit cards. There’s a limit to how much you can borrow, and you just need to pay for how much you’ve borrowed. This also works as a revolving line of credit. Once you’ve borrowed the money and paid it back, you can borrow it again. However, there’s a time frame set for borrowing. After the time frame is up, you have to pay off the account, or else lose your house.
How Can You Get a Second Mortgage?
You’re probably thinking about all the things you could do with those funds. So how do you get a second mortgage and tap into the source of money that’s already there in your home?
The main requirement is to have plenty of home equity to work with. Here are the other things lenders will look for before giving you a second mortgage.
1. Good Credit
If you were struggling to pay off the first mortgage, you’re not too likely to be approved for a second one. You need to be able to show that you always make your mortgage payments on time. If you don’t have that evidence, a lender probably won’t even look twice at your application.
Most of the time, lenders will want an appraiser to check out your house and calculate how much equity is there. You can start out with a basic estimate, using the amount of mortgage you have left and the number of payments you’ve made.
But an appraiser will be able to give a more accurate number that reflects your home’s market value.
3. Minimal Debt
Having minimal debt is important for getting approved for a second mortgage. Lenders want to see that you have plenty of income and aren’t bogged down by debt. They’ll want to look at your tax returns, pay stubs, and bank statements.
Is a Second Mortgage Right For You?
Wondering if a second mortgage is the right choice for your financial needs?
There are a few major reasons why you might get a second mortgage. First, many people choose this option to pay off their debts. You can use a loan on your home equity to pay off a different loan. This might include student loans, medical bills, credit card debt, and more.
Many people also use second mortgages to finance their home improvement projects. When you improve your home, you can raise its market value and add even more home equity.
Less frequently, people also use second mortgages to make significant purchases. No matter what your motivation is, just make sure that you’re using your second mortgage for something you truly need.
Wondering how to calculate your second mortgage? A reliable calculator helps – check out ours here.