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Last updated on February 3rd, 2021 at 10:14 am
Author at Compare Closing LLC
Amanda Byford has bought and sold many houses in the past fifteen years and is actively managing an income property portfolio consisting of multi-family properties. During the buying and selling of these properties, she has gone through several different mortgage loan transactions. This experience and knowledge have helped her develop an avenue to guide consumers to their best available option by comparing lenders through the Compare Closing business.
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Our home is the most valuable collateral. If you’re a homeowner and in need of cash to pay for a renovation, cover your child’s college education, or consolidate debt, a second mortgage can provide the funds.
Before entering into a 2nd mortgage you need to know –
- The amount of equity you have in your home will decide the amount you can borrow with a second mortgage. You can borrow in a second mortgage on your equity, along with your credit rating, debt load, and income. Though the guidelines vary from lender to lender, as a general rule you can borrow up to 80 percent of the value of your home, minus the remaining balance of your primary mortgage.
- You get a lump sum upfront and then pay that money back in monthly installments over a set period of time, which generally ranges from five to 15 years, with fixed-rate interest, so your interest rate won’t go up or down during the repayment period.
- A HELOC doesn’t provide money upfront, but rather gives you access to a line of credit, much like a credit card. Interest rates on HELOCs are adjustable, meaning the rate can go up or down depending on changes in the economy.
- The interest rate on a second mortgage is a little higher than the rate on a primary mortgage but much lower than those on credit cards or unsecured personal loans.
- Strong credit history and good credit score is required. Lenders like to see a credit score of at least 620 before approving a second mortgage.
- What is the reason for your 2nd mortgage? Lenders are less likely to approve second mortgages for riskier or trivial uses, such as vacations, daily living expenses, credit card payment, or investments.
- 2nd mortgage usually has a high closing cost, and these can be as high as 2 to 5 percent of the total loan amount. You may have to pay for a home appraisal, which can cost between $300 and $500, a title search, which adds another $100 or so. And HELOCs sometimes have additional costs, like annual membership, minimum withdrawal fees, or early termination fees.
- It could also means filling out extensive paperwork like, proof of employment and income, how you’ve purchased other assets, what your current debt load is, and if you are currently involved in, or likely to be involved in, a lawsuit or divorce they may even ask your race or ethnicity. Department of Housing and Urban Development (HUD) requires this information.
- Remember that once you get your new loan, you’ll have two monthly payments, one for your primary mortgage and one for the second mortgage. If you’re not secure in your job, are considering a move, have significant family obligations that might require you to take a leave of absence, are in poor health, have a history of spending unwisely, or are otherwise in a shaky financial situation, do not take a second mortgage.
- Your house serves as the collateral for both your primary and your secondary mortgage. It is a risk unless you are certain you can handle the financial obligation. Should you fail to make monthly payments on time, not only will your credit score go down, but the lenders can, and eventually will repossess your home, sometimes within months. Generally, once a lender takes your home, it will be sold as a foreclosure, with the proceeds going to the lenders as a way to recoup their losses.
If you are starting to fall behind on your payments, call your lenders right away. They will often work with you to prevent foreclosure.
Reference Source: BOB Vila
