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Second mortgage - Know what it is all about


WK03MU - Second-Mortgage - Know what it is all about

Do you know what a second mortgage loan is all about? It can help you in many ways. You can go through this article to know what second mortgage is all about along with its advantages and disadvantages.

Types of second mortgage loans

There are 2 types of second mortgage loans which you can take out against the equity of the property. They are:

1. Home equity loans - When you obtain this type of loan, you get the borrowed amount all at once. There is a time period within which you need to pay back your loan at a fixed rate of interest.

2. Home equity lines of credit (HELOC) - This type of loan usually works like a credit card. You take out a required amount and repay a certain amount and you pay back the borrowed amount at an adjustable rate of interest.

Benefits of taking out such a loan

There are several benefits of taking out a second mortgage loan, which are discussed in the following lines.

  • Low interest rate - Usually, the interest rate on a second mortgage loan is relatively low since the amount is secured by the equity in the property.
  • Tax deductible interest - The interest paid on such loans is usually tax deductible to a certain extent.
  • Get dollars to spend - You can get dollars, by mortgaging the equity in the property, which you can use as per your necessity.

How you can use the borrowed amount

You can use a second mortgage loan in various ways:

  • Make home improvements - This is perhaps the best way to utilize such a loan. Since you’re risking your property to take out a certain amount, it is better to use it for home improvements, which in turn, will help to increase the value of the property.
  • Paying off debt - When you’re drowned with credit card debt, opting for second mortgage is a suitable solution. However, by doing so, you actually replace your unsecured debt(s) with a secured loan.
  • Purchasing additional home - Whatever way you use the borrowed amount, make sure you use it for your necessity and not for incurring additional debt such as, going on a vacation or buying an expensive item. This is because you actually risk your home by taking out such a loan. If by chance, you’re not able to pay off the loan, the lender can foreclose the property.

How much you can borrow

There are certain factors based on which the lenders decide how much you can borrow:

  • Your credit score - The lenders might not approve your loan request if your credit score is low.
  • Amount of equity in your home - You cannot borrow more than what the equity of your home is worth of.
  • The loan-to-value ratio (The percent of property mortgaged) - Usually, lenders do not approve your request to take out a second mortgage loan if your loan-to-value ratio is more than 75-85% combining your first and second mortgages.

Disadvantages

Here are some disadvantages of taking out a second mortgage loan.

  • Fees to obtain the loan - You might have to pay a closing cost to obtain the loan. The fees usually varies between 3-6% of the loan amount.
  • May not get a good interest rate - You may have to pay more on the interest if you don’t have a good credit score.

If you need to obtain a second mortgage loan, you can overcome these adverse factors by deciding the right time to obtain the loan and managing it properly. First of all, check out your credit score and then apply for the loan so that you get a suitable interest rate. And, make sure the reason, for which you’re applying for the loan, is good enough to risk your property. Most importantly, when you take out such a loan, make sure you make the payments on time, so that you replenish the home equity within the required time period.

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