If you own your own home you might have considered getting a second mortgage.? When you first buy your home you will typically take out a mortgage to pay for it. A second mortgage is taken out against the property after you get that initial loan. It allows you to use the equity, or value of your home, as financing. There are two types of second mortgages that you need to know about.
The first is a home equity line of credit (HELOC). This is a loan where the lender (usually a bank or mortgage company) agrees to lend a maximum amount of money that is to be paid back in an agreed amount of time, called the term of the loan. In this loan the collateral is the borrower’s (home owner’s) equity in their property.
The second option is a private loan. As with a home equity line of credit, the collateral is still the borrower’s property. The difference is that the loan is not made by a traditional mortgage lender.
There are advantages to taking out a second mortgage. For example if you go with a HELOC you might be able to secure lower interest rates than those that come with an unsecured loan or even credit cards. This is possible because the lender has some security in the event that a client defaults.
Unlike a traditional mortgage, the money from a second mortgage can be used for a variety of purposes. Some examples are home improvements, buying a big ticket item, or paying off higher interest loans. So if you need to install a new garage, remodel your kitchen, or just take a vacation then a second mortgage might be a good option.
There are some risks to consider if you are looking into second mortgage. The first thing you need to do is consider the equity you have in your home. If the property doesn’t have enough equity to substantiate the loan it is unlikely to be approved. You also need to consider if you will be able to make the monthly payments during the term of the loan. If you are unable to afford the payments you will be putting your entire property at risk.
When thinking about getting a second mortgage be sure to do your due diligence. Be sure to look into a home equity line of credit or a private loan. One of these options can save you a lot of money and can save your home considering which is best for your circumstances. Many homeowners have chosen to use a second mortgage because the advantages outweighed the disadvantages for them.