Sometimes, as a home owner, you may see the need a lot extra money for a variety of reasons. When you buy a home you put a down payment on your house, usually around 20% or less. As the years go by, you pay down a portion of the mortgage and most likely your house has appreciated in value. The difference between what your home is worth in terms of your local real estate market, and the outstanding balance on your mortgage is known as equity. In other words, it is the profit you would realize if you sold the house right now at this particular point in time.
This equity is also something you can borrow against. The loan you would get from a lending institution is called a second mortgage. The reasons for getting a second mortgage are varied. Whatever you reason, it should be done with careful thought and planning because it is a big decision which should not be done lightly.
Generally speaking, you cannot borrow against the full equity value of your home. Normally, lenders will allow you to borrow up to 85% on the amount of equity you have built up in home. Also, most lenders will not issue unless you have built up at least up to 20% equity in the value of your home
When you get a second mortgage, be very clear that you are using your home as collateral to secure the loan. In this regard, your second mortgage is just as important as your first mortgage. Payments must be made in a timely manner. If you fail to make the payments on a second mortgage, you run the risk of having your home being foreclosed by the bank.
Before you take out a second mortgage you must be very comfortable in your financial circumstances and be confident about your ability to manage the payments on a second mortgage. Also, be prepared to apply for a second mortgage in the same manner as when you applied for a first mortgage and will require updated documentation to apply. Make sure your credit rating is up to snuff and perform a credit check on yourself.
The main reasons why people use a second mortgage often involve major home renovation projects, or to purchase a second home or vacation property or cottage. They may also sometimes use the funds to help finance the college or university tuitions of their children. Some people also use second mortgages to consolidate debts. Be cautious with this one as you don’t want to repeat the situation that got you to this point in the first place.
One advantage of a second mortgage is that the interest rate you will be paying will be cheaper than if you were to borrow the money as a personal loan or use your credit cards. The reason for this is because as the lender will be using your home as collateral, and the loan, as a second mortgage, is considered to be a secured loan.
Another thing to remember about getting a second mortgage is to expect to pay a slightly higher interest rate than what you are paying on your first mortgage. Although it might seem tempting and convenient to get a second mortgage from the lender who gave you the first mortgage, it might pay to shop around for a better rate so you can save money.
Photo by Mathowie
