Your home is not only likely to be your largest asset, it is your most important financial asset. It provides a safe and secure place for you to live. And in a pinch, it can provide a source of emergency cash or fund its own improvement. Second mortgages could really be tempting. It is a good way to take advantage of your home equity, but getting one of these mortgages is not something that you should take lightly. There are numerous pitfalls that you should avoid. Many people use them as a way to raise money instead of remortgaging, but there are some things you need to be aware of before you apply. Here are some tips to help you in taking out a second mortgage.
Purpose
Using your home equity to make home improvements makes the most sense. If you are making changes that will increase the value of the home such as, adding a room, finishing a basement or upgrading the kitchen, borrowing against the value of your home is sensible (if you can afford to make such upgrades without borrowing, that would be even better). Borrowing against your home equity to buy a car is unwise, if only because car loans are often issued at lower interest rates than home equity loans. Borrowing against your home equity to pay-off other debts is not crazy, but it could easily mean that you'll be paying on goods and services long since consumed for a decade or more, making them much more expensive.
Based off Home Equity
It's important to realize that a second mortgage is based off the equity you have in your home. Equity is the difference between the value of your home, and how much you owe on the mortgage. So if your home is worth $150,000 and you have $50,000 left on the mortgage you have $100,000 in equity available to you. Most lenders will allow you to borrow between 60% and 80% of your total equity in the form of a second mortgage.
Interests Rates
In general, second mortgages implement higher interest rates. This is logical because lenders are taking greater risks in providing such loans. If you would get into default on your loans, you are required to first settle your primary or first mortgage. Only after settling your first home loan would you be required to take care of the second.
Check the APR (annualised percentage rate) applied. It is advisable not to immediately apply for the second mortgage you find. There could be other second mortgages with lower APRs. As you perform a comparison before your decision, get quotes from several banks, credit unions, and dedicated mortgage lenders so you could logically find the best product there is for you.
Shop and compare
Unlike home mortgages, which are standardized to the point that everyone offers virtually identical rates, home equity loan rates vary. Don't just accept the rate quoted by your local bank. Check BankRate.com for the best rates available in your city and circumstance.
An Additional Lien on your Home
When you take out a second mortgage you are putting another lien on your home. This second lien puts the second lender in line behind the first lender to get your home. This means even if you pay off your first mortgage but then default on your second you are still going to lose you home. When you take a second mortgage you increase the chances that you will lose your house and give yourself more debt to pay back later on. It is not a decision that should be taken lightly.
Terms and Conditions
It is a must to carefully read and understand the terms and conditions of all second mortgages you consider taking. When you compare to choose the best, do not focus on just the rates and fees. Look at the terms and conditions because there could be many other provisions that could make second mortgages advantages and disadvantages.
Check out any balloon payment. Most second mortgages initially offer low and more affordable payments. Those usually require bigger payments at the end of the loan. Carefully read the loan contract to find out if such balloon payments would be ideal for your situation.
Homes are the foundation of a family financial future. The ability to borrow money against the equity of a home is one of its greatest features.
Keep these considerations in mind before you acquire an additional mortgage on your house. Since you are basically putting your home up as collateral with a second mortgage, you should only take one out for very important purchases.
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