Here, we’ll explain what a second mortgage is all about, as well as share some good news — it’s not your only option!
What Does “Second Mortgage” Mean?
A second mortgage is a loan that uses your home’s equity as collateral to borrow a new sum of money. The equity of your home is its market value minus any money you still owe on your original mortgage. There are two main types of second mortgage loans:
- Lump Sum – This is a one-time home equity loan that gives you a lump sum of money all at once. You can gradually repay it over time with fixed monthly payments, meaning they are the same each month and include a portion of your loan balance along with a portion of your interest costs.
- Line of Credit – This is basically a pool of money that you can draw from whenever you like until you reach the maximum limit of the loan. Much like a credit card, you can borrow and pay over and over, typically at a variable interest rate.
How Does a Second Mortgage Work?
The process of securing a second mortgage is similar to that of applying for your first mortgage. You’ll need to provide documentation for things such as your income and debts, and will likely need to get an appraisal of your home to confirm its value.
While equity requirements vary from lender to lender, most prefer that you have 15-20% equity in your home, and will allow you to borrow up to 85%.
Keep in mind that interest rates tend to be higher for a second mortgage than a first since lenders know they will be second in line to get paid. In the case of foreclosure, your first mortgage payments take priority.
Why a Second Mortgage Can Be Risky
A second mortgage is beneficial when you use it to make home improvements, increasing the value of your home. This allows you to maintain and even build upon the equity you have, and when you use the loan in this way, interest may even be tax-deductible. But beware…
A second mortgage also means a second monthly payment, separate from and in addition to your first mortgage payments. It becomes risky if you struggle to make the new payments on top of your original ones or use the loan to purchase luxuries that put you further in debt.
Remember, this type of loan uses your house as collateral, so if you are unable to pay it back, you will lose your home — and the damage to your credit score can affect your ability to buy a new one.
That’s why it’s important to think carefully before you take such a big and drastic step. If you’re considering a second mortgage to keep your home, you may end up in an even worse situation than you were before!
Why Selling to a Real Estate Investor Can Be a Better Option
Real estate investors, like the team at Renewed Homes, can purchase your house as-is, for cash, allowing you to move on and into something you can comfortably afford. For a hassle-free sale and a fresh start, contact Renewed Homes today. We can help you find the best solution for your situation.
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