Second mortgages or home equity loans are instruments used by people to borrow more money on an already mortgaged property. The second loan can be for debt payments, home renovation costs, or other personal expenses. These second mortgages are preferred over personal loans because they have lower interest rates. However, they are not easy to get, and require your primary residence to be collateral. If you are in urgent need of money, consider all your options before deciding on taking out a second mortgage.
Be sure you can make regular payments
You will be risking your house when you take out a second mortgage, and need to be sure that you can make regular payments and repay the debt in time. Assess your finances, income and expenses before making this decision.
Find out your equity
Your equity in your home is its value, without the first mortgage obligations. This residual value, or your equity, will determine how much you can borrow on the second mortgage. You will need to get your home appraised to get an estimate before you proceed.
Check your credit score
Second mortgages are hard to get, especially if you have a poor credit store. The better your credit score is, the lower your interest charges will be. Check your credit score to see whether it is good enough for a second mortgage application.
Contact your bank or lender to discuss a second mortgage
If you have decided to go ahead with a second mortgage, you will need to contact your existing bank or lender in order to discuss the way to go about it. Since you are already doing business with them, they may be able to offer your favorable packages.
Compare different rates
After getting packages from your existing lender or bank, you should look around the market and compare the rates on offer with those you got. Even if you trust the mortgage company you are working with, it is best to run comparisons.
Check the terms of the loan properly
You should avoid loans which have strict penalties, because even if you miss one payment, due to an unforeseen issue, you could end up burdened with an increased interest rate. Moreover, you need to understand how fixed and adjustable interest rates work, along with balloon payments.
Avoid bundled insurance
You won’t need additional coverage with your second mortgage, since the first one will suffice. However, even if you do require insurance coverage, it is better to find better rates on your own rather than accepting the bundled insurance coverage.
Consider extra costs
Extra costs, including process fees and fees for any help you hire, should also be considered before you decide to take out a second mortgage.