A secured second mortgage can be one way to lessen your
current financial burden and manage additional expenses. Home equity can be
harnessed as a means to create immediate cash flow when necessary, an option
many new homeowners may not necessarily realize.
What is a Second
Just as it sounds, a second
mortgage is a mortgage you incur in addition to the original mortgage you set
up when purchasing your home. This means while making payments on your original
mortgage, you will be making payments on your second mortgage at the same time.
There are two major categories of second mortgages: home
equity loans and home equity lines of credit. The home equity loan allows
you a large sum of money which is repaid gradually through monthly payments
with a fixed interest rate. The home equity line of credit works like a credit
card, allowing you to borrow what you need when you need it. The term
"second" means it does not take priority over your initial mortgage
and you are obligated to pay off the initial loan first if you sell your house.
You can borrow up to 85% of the appraised value on your home after accounting
for the original value owed on your first loan. For example, if your current
home was appraised at $600,000 and your current mortgage is for $400,000 you could potentially be eligible
for an $110,000second mortgage.. Naturally, this option only exists for those
who have existing equity in their home to borrow against. Equity occurs as you
pay down your existing mortgage or if your home increases in value over time.
When a Second
Mortgage Would be Most Beneficial
The major benefit
second mortgage is that you have access to a large sum of money which you can
spend however you see fit. You might consider a second mortgage in cases where
you would need a lot of money up front to pay for a home renovation, a new car,
or past and future educational costs. Credit cards typically have higher
interest rates than second mortgages, allowing you to put money towards the
principal amount owed rather than just the minimum monthly payments. Credit
cards also only give you limited access to amounts which may not be enough for
your current needs. In this case, your home equity can provide the extra cash
you may need. Second mortgages are especially beneficial when interest rates
are low and your current home value is increasing.
Similar to any financial decision, it is important to do
your research and make a repayment plan. Defaulting on your second mortgage
could cost you your home. Make sure to shop around for the best rates and
assess the accompanying fees to make sure it’s the right choice for you.
A secured second mortgage with your current or outside
provider can prove to be an excellent choice for homeowners looking to free up
some equity in their home.