As many homeowners can attest, getting approved for a mortgage is not always the easiest process. Yet, applying for a second loan against your home may become an option to consider at some point in the future.
A second mortgage, taken out while your original home loan is still in effect, lets you borrow money against the value of your home. What should you know before applying?
Reasons to Apply
There are many reasons someone may take out a second mortgage, including cashing out their equity, money for home improvements or paying for a child’s college education. Before taking this leap, think about a few important points.
How the Process Works
The standard second mortgage is paid in one lump sum, which is then paid back by the homeowners in monthly installments. Like your current mortgage, failing to make payments may lead to foreclosure.
Interest rates on second mortgages are often higher, since this loan only accrues money when the first mortgage is paid.
Who Needs One?
Once you understand the application process, the real question becomes: Do you need a second mortgage? Some homeowners may decide to use the loan to pay off debt, but this comes with risk. If you move unsecured debts to your home and suddenly become unable to pay the mortgage, you put your home at risk of foreclosure.
Another reason to take out a second mortgage is to fund a big home improvement project. Especially if you plan to sell your house in the future, renovations seem like a great idea. Yet if the value of homes in your area drop once you’re ready to sell, the increased market value of your home may become obsolete.
The Bottom Line
Second mortgages are a financial risk. Before heading to the bank, work with a financial planner to determine whether or not you can afford the risk and if it’s even a good idea for your situation. If you are having trouble making payments, a professional can also provide alternative solutions.
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