If you are considering getting a 2nd mortgage on your home, you are not alone! Second mortgages are fairly common, especially for families and people who may be struggling financially to pay off an initial mortgage. It may seem overwhelming at first, but it doesn’t have to be! The following are three essential tips that will make the process of taking out a 2nd mortgage on your house much easier and hassle-free.
Tip #1: Decide which type of second mortgage is best for your circumstances
There are two primary types of second mortgagees: HELOCS, or home equity lines of credit; and home equity loans.
A HELOC is an open-ended mortgage which is similar to a credit card, in that you can borrow as much money as you need up to a specific limit even while you continue to pay off the mortgage loan. HELOCs are best if you are borrowing a smaller amount of money, need to borrow several sums of money throughout a longer period of time, or if you are unsure about the exact amount of money you are going to need.
A home equity loan is a close-ended mortgage, meaning that you only receive one specific sum and may not borrow additional money from that mortgage. Home equity loans are best if you need one lump sum of money and know how much you need ahead of time.
Tip #2: Determine the factors that could determine your approval and interest rates
There are three primary factors which could affect being approved for a second mortgage, as well as what type of interest rates you can receive. These factors are your credit score, the value of your house, and your equity.
You can find out your credit score by paying for one at a federally approved agency; you should note that your credit score will not be shown on a free credit report. Credit scores will specifically impact whether or not you are even approved, as well as what interest rates will be made available to you.
The value of your house will be used to help determine your equity. You should have your house appraised to get a definite value that can later be used to help you in your application for a 2nd mortgage.
Your equity value, specifically the equity on your home, is determined by subtracting how much you owe on your home from the value of your home. For example: If your home is valued at $120,000 and you owe $60,000, then your equity is $60,000. Equity is used to determine how much money you can be loaned in a second mortgage.
Tip #3: Get estimates from multiple sources before deciding on one
It can be tempting to go with your local bank or original mortgage company, especially if you are in good standing; but it’s important to get estimates from other banks and lenders before deciding on one, since you may be able to find better offers and lower interest rates at somewhere other than your home bank. If you do find a better offer for a 2nd mortgage elsewhere, you should consider asking your local bank if they can match it—it never hurts to try!