Home owners who meet the lending criteria may be able to get a second mortgage loan if they qualify. You may have heard radio advertisements recently bragging about how low second mortgage rates are today for home equity lines of credit and fixed cash out 2nd mortgages. Getting a second mortgage can help you to access cash to pay for things that you need:
- Pay off other debts and high interest loans
- Remodel the home to increase value for resale
- Pay for a college education
- Invest in a business
- Invest in an Investment Property
- Down payment to buy a vacation home.
However, taking on a second mortgage carries risks, so you need to consider all of the pluses and minuses with care. Use this article as a guide to help you to make a decision about getting a 2nd mortgage.
Definition of a Second Mortgage
Most Americans take out a mortgage to buy their home. Once you have made progress in paying off your mortgage, you can try to get a second mortgage on the property. A second mortgage is just another home loan that you can take on to access capital. That capital is usually not available to you until you sell your home.
Second mortgages are one of two types:
- Home equity line of credit or HELOC: This is a line of credit just like a credit card line of credit, except that the line of credit is the equity in your property. You can use this secure credit line to pull out cash as you need it. The HELOC loan comes with a rate that adjusts with the market; this will typically be low up front as you are paying only interest. As time goes on, the rate can go up if rates go up on financial markets.
- Home equity loan: This is a lump sum, fixed rate loan that is provided to you all at once. The payments will be higher than a HELOC, but you can count on one, stable payment for the entirety of the loan.
Getting a Second Mortgage
There are thousands of lenders in the US that offer second mortgages. You can choose from many second mortgage lenders; you do not need to use the same lender as with your first mortgage. We recommend that you shop around with other second mortgage lenders, including banks, brokers and credit unions to see if you can qualify for good, low interest second mortgage rates.
Applying for your second mortgage is similar to getting a first mortgage. You will have an underwriting process where the lender reviews your credit, assets and liabilities. If you have acceptable credit, you should be able to secure a second mortgage for up to 85% of the equity you have in the home.
What Are the Benefits of a Second Mortgage?
You can use a second mortgage for almost anything. Whether you need to pay for a new car, a home rehab, or a college education, you can get the cash you need for something you need.
Which type of second mortgage you get really depends upon your circumstances.
If you need a large lump sum at one time, such as to buy a new car, you might opt for a home equity loan. Home equity loans can also be useful to help you if you need to lump sum to pay for college education.
If you do not know how long you will need money, or want to borrow different amounts for a long time, you may want a home equity line, also called a HELOC. This type of 2nd mortgage credit line allows you to pull out cash as you need it. The rate can vary, so bear that in mind if you are averse to the higher risk exposure. But the HELOC loan also will only charge you interest on the money you have pulled out; a home equity loan charges you interest on the full amount.
In either case, your second mortgage interest should be fully tax deductible. You can get a tax write off for as much as $100,000 of your debt or the level of equity you have built in your home. Learn more about home equity loans and tax deduction rules for 2017 and 2018.
Risks of a Second Mortgage Loan
No guide for getting a second mortgage would be complete without mentioning the risks:
- You have to pay back whatever you borrow. The home is the collateral on the loan; that is why you are paying a low interest rate on such a large amount of money. But if you do not pay, you will lose your home. So, you should be sure that you can pay back that money.
- The rate is higher than a first mortgage. The second mortgage is paid off after the first in case of foreclosure, so the lender will charge a higher rate on the second.
- 2nd mortgage closing costs. You will pay 3-6% of the amount of the loan in closing costs.
- HELOC rates can rise. Not only do you have a variable interest rate; you also will have a draw period for a certain period of time, usually five or 10 years. This is an interest only period. Then you need to pay interest and principle in an effort to pay off the entire balance of the second mortgage terms.
Getting a second mortgage is a perfectly good thing to do in some circumstances, but it is not without risk. Millions of Americans took out second mortgage during the real estate boom of a decade ago, and counted upon rising home values to continue so they could refinance. But the market crashed and many lost their homes.
So, we advise that you consider the advantages and disadvantages of getting a second mortgage loan carefully before you do so.