One of the most useful things about being a homeowner is the ability to tap into the equity in your home. When you do this, it is called a second mortgage. You might also hear second mortgages referred to as “home equity loans” (HEL) or “home equity lines of credit” (HELOC). These types of home loans can be very helpful, since lenders are more likely to provide you with a large sum of money when it is secured by something valuable ― like your house.
However, getting a second mortgage is not as simple as just walking into a bank and asking for a loan based on your home’s value ― there are certain steps that should be taken. It is also important to remember that a second mortgage is a new home loan, completely separate from the first mortgage.
Getting a Second Mortgage
The first step is to determine whether you have enough equity in your home to qualify for a second mortgage. Your home equity is not the same as the market value of your home. Equity is the difference between you owe on your original (first) mortgage and the value of your home. For example, if your home is worth $190,000 and you still owe $170,000 on the mortgage, you have $20,000 of home equity.
You should speak with a mortgage lender about how much you can borrow based on the equity you have in your home. This will give you a rough idea of what’s available to you, since most lenders won’t issue second mortgages for the entire amount of equity in a home. Also note that the lender will probably order an appraisal of your property to determine its market value.
In addition to having sufficient home equity, you will also need to have a good credit score. Since a second mortgage is a new loan, the lender will want to see a credit report. You may be denied if your credit is not good enough. Your credit score will also provide a basis for the interest rate that you get on the second mortgage loan. If you do not have a solid credit score, you may want to work on improving it for a few months before you apply for a second mortgage.
Second mortgages are handled like most other loans. You will be required to show documentation and proof of income, debts, and other financial information necessary for loan approval. You will also need to fill out an application and be prepared to pay the related loan fees (such as origination fees, closing costs, and other lender charges).
If you have adequate home equity, proper documentation and a good credit score, you should have no trouble getting a second mortgage.