Getting a second mortgage is a logical choice for many people. Credit cards impose double-digit interest rates, and it can be quite challenging to pay off credit card debt. In that sense, if you need to borrow a few thousand dollars, you can tap into the equity of your home. Second mortgages give you access to your home equity
In this article, we’ll discuss the problems associated with a second mortgage. We’ll also consider whether it is the right option to get a second mortgage.
What’s a Second Mortgage?
A second mortgage is secured against the equity in your home. Your home acts as the collateral for the primary loan. You can get a first-mortgage with a down payment of as little as 3.5%. However, a second mortgage can finance a maximum of 80% of your home’s value. It would be best if you had at least 20% equity in the house before you can choose this option.
Ideally, a second mortgage is suitable for people who have paid their mortgage for some years. Now, they need access to money, and because of the low-interest rate, the second mortgage can be a good option.
How Do You Get a Second Mortgage?
You’ll need a lender who will finance your decision. Just like getting a primary mortgage, you’ll need to get pre-approved. The bank will review your credit history, condition of the property, and your employment status to determine your eligibility. It is mandatory to have equity in the house.
The mortgage lender will be the second lien holder on the property. If you default on the loan, the first mortgage will be paid first and after that, the leftover sum is used to pay the second lender. Banks are aware of this situation and that’s why second mortgages almost always have high-interest rates.
Since you are getting a new loan, you need to calculate the cost. There will be processing charges and loan origination fees. Consider these costs before applying for such an investment.
Why Should You Get a Second Mortgage?
The best reason to use this option is to pay the high-interest debt. Credit cards carry a double-digit interest rate. It is hard to pay the student debt. If you are struggling with multiple payments, you can use a second mortgage to consolidate your debts. That way, you’ll have a single amount each month with a fixed interest rate.
The most significant disadvantage of getting this loan is that you are risking your home. The lender can foreclose your property if you are unable to pay back the loan.
Second mortgages come in two forms i.e. home equity loan and equity line of credit. The first option gives you a lump sum of money. Let’s say; your home is worth $280k. Your equity in the house is $65,000, and you need to borrow $30,000. You can take an equity loan with a fixed amount of $30k.
The equity line of credit gives you access to cash on a monthly basis. You can think of it as a credit card with some limit. If you are struggling with health issues or financial problems, you can use this option. You can continue to borrow from home equity. Details vary from lender to lender. In the end, you might have to sell your home to pay back the mortgage.