One of the ways that you can put your home to work for you, in a financial sense, is to get a second mortgage. A second mortgage will help you take advantage of the equity that has built up in your home. The money you receive from a second mortgage does not have any restrictions ― you can use it for whatever you need. If you have owned your home for a while, and you’ve been paying down the first mortgage as the home’s value has increased, you may be able to secure a second mortgage using your home equity.
It is important to understand that a second mortgage is brand new loan on your home. A second mortgage is separate from a first mortgage, so you will have to go through the loan application process all over again. In order to get approved for a second home loan you will need a good credit score, sufficient home equity, and steady income that can support the additional mortgage payments.
You should be aware that second mortgages can result in default. Many people find themselves with negative equity after taking out a second home loan. In order to avoid this and have a successful second mortgage experience, consider the following consumer tips:
Don’t borrow more than you need
Think about how much money you need to meet your financial goals. Don’t go overboard with your second mortgage, or it could end up hurting you more than it helps.
Shop around for the best terms
Compare second mortgage products from 3 or 4 different lenders. Consider the interest rates, term length, closing costs, and other expenses. You may want to get a fixed interest rate (if you can), since adjustable/variable rates can increase and make it difficult to afford the second mortgage payments. [See: How to Find the Best Mortgage Lender]
Be wary of second mortgages with “teaser rates”
Some second mortgages have low initial interest rates to attract borrowers, but the rates increase after a set period of time. This can lead to difficulty paying when the mortgage loan resets.
Have an emergency fund
It is best to get a second mortgage when you are in a stable financial situation. However, since life is uncertain, the best you can do is to be prepared by setting up an emergency fund. This fund can help you meet your financial obligations (such as mortgage payments and utility bills) if something should happen to your source of income.
Consider your timeframe for selling
It‘s usually best to get a second mortgage if you are planning on staying in the home for a while. If property values drop and you end up with negative equity, selling your home will be very difficult. If you stay put, it gives the real estate market more time to recover.
There’s no doubt that a second mortgage is a big commitment. Make sure that you consider the options, and understand the possible consequences, before deciding on a second mortgage loan.