For many people, a home is their most significant investment—and a potential source of capital. Getting a second mortgage or a home equity loan can tap that equity for college, home improvements, or other pressing financial needs.
Steps:
- Figure out why you need or want a second mortgage. Knowing your purpose will help you decide how to work with lenders and determine how much you can borrow based on your home’s increased value and equity.
- Run hypothetical calculations through a mortgage calculator to be certain you can afford the additional payments involved in a second mortgage.
- Arrange for an appraisal of the home. (A second mortgage, like a first mortgage, will require an assessment to determine the home’s market value.)
- Ask your lender about closing costs.
- Ask if the lender requires private mortgage insurance (P.M.I.) on a second mortgage.
- Ask your lender to determine if you would be better off refinancing your house rather than taking out a second mortgage.
Tips
- Since a home equity loan is considered a second loan after your original mortgage, you’ll likely pay a higher interest rate than standard mortgage rates. A second mortgage adds to your existing loan, so it’s essential to know your home’s current value compared to what you still owe.
- A second mortgage is an additional loan on top of your current mortgage, so it’s essential to know your home’s value compared to what you still owe.
- You will only have interest and principal payments on a second mortgage – taxes and insurance are only paid once on your first mortgage.
- Sometimes, the holder of your first mortgage will be more accommodating than another lender on a second mortgage since you are a known customer.
- A second mortgage, when used wisely, can help pay off credit card balances and other high-interest debts.
- Sometimes, lenders may reduce or even waive the closing costs on a second mortgage.
- If you have been in the home long enough and have built up enough equity, you might be better off refinancing your entire house rather than adding a second mortgage.
Warnings:
It’s usually best to avoid lenders who offer loans exceeding your home’s value. While the extra money might be tempting, remember you’ll need to repay it, even if your home isn’t worth that much.
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