December 31 21 ?? Most homeowners who borrow money to buy a home or investment property will take ‘first’? Mortgage. But apart from your first home purchase loan, there are other reasons you might have to borrow extra money, and these include financing some home improvements or consolidating your debts. This is where taking out a second mortgage comes in.
Accordingly, if you are considering getting a second mortgage or a home purchase loan, this article will cover what you need to know about what a second mortgage is and when it makes sense to get it.
What is a second mortgage?
A second mortgage is a loan that uses the equity in your home as collateral. The equity in your home is the percentage of the resale value that you fully own. Hence, second home loans are also home purchase loans. However, your equity begins with the down payment after you finance your home with a mortgage loan, and you earn more equity with each payment until the final price leads to 100 percent equity. On the other hand, if you stop making the payments, you will lose your home because it is a security.
Furthermore, in terms of the mortgage equity line requirements, you will typically need about 20 percent of the equity in your home to qualify for a second mortgage. The lender will get an appraisal that you will have to pay to determine the market value of the home.
Types of second mortgages
?? home equity loan
With a capital loan, you’ll return the total amount you borrow in a series of equal monthly installments over the repayment period. It’s important to note that you can use this type of second mortgage for expensive expenses, such as renovating a large home or replacing a roof. The cost is fixed and advertised, and you can use the loan amount to cover it completely.
?? Home Equity Line of Credit (HELOC)
A home equity line of credit works like credit cards, but it’s secured by your home’s balance. With HELOC as your second mortgage, you can have a set credit line that enables you to borrow money as much as you need. It is also important to note that although you can use this type of second mortgage for any purpose, it would be best to get one if you have significant cash needs such as a complete home renovation or college tuition.
When should you get a second mortgage?
?? When you need extra cash to buy a house
It is preferable to obtain a second mortgage if you plan to buy a new home before selling your current home. Determining the right timing when selling your current home to potential buyers, to purchase a new home, can be challenging because home buyers are also looking to cater to their own interests. For example, if you own a home in Chicago, Chicago homebuyers are looking for lower mortgage rates.
So, if you need to buy a new home before you finish selling your current home, you can consider getting a first and another mortgage that covers the profit you expect from your current home.
Then you can settle the second mortgage with the profit of the sale when the home buyer buys the home you are selling.
?? When you want to take advantage of more real estate equity
Even if you’re happy with your first mortgage, you can still transfer some home equity when you want to do so for the foreseeable future. You can use the money to pay for college tuition, your credit card debt, or use it as a financial vehicle for unexpected expenses in the future.
?? When you need to make home improvements
Another best time to get a second mortgage is when you’re planning a major home renovation, such as adding a new bedroom or putting in a new kitchen. There may be interest on a tax-free mortgage with a second mortgage if the financing is for a home improvement.
?? When Planning to Refinance and Bypass Mortgage Insurance
If you borrow more than 80 percent of your home’s value, you must obtain mortgage insurance on your first mortgage. The good thing is that with a second mortgage, lenders allow borrowers to take up to 100 percent of the value of their home on a mortgage refinance without getting mortgage insurance.
?? When you plan to borrow more shares
You should consider getting a second mortgage if you plan to borrow more equity instead of taking a cash refinancing. Cash refinancing occurs when you take out your first home loan for more than what you currently owe and get the difference in cash. Most first home loans, and cash back mortgage refinance options allow individuals to borrow about 80 percent of the value of their homes. But on the flip side, second mortgage loans allow some customers to borrow up to 100 percent of the value of their homes.
If you are considering getting a second mortgage, it is a good idea to familiarize yourself with all of its requirements and speak with a mortgage broker or bank to see if you qualify. It should also be noted that using the extra money that a second mortgage provides means taking on more debt. So be sure to carefully consider the cost of borrowing.