It doesn’t matter what kind of unexpected or even planned expense you have to pay, if you have equity in your home, you can apply for the second mortgage and you will probably be approved. As you surely know, your home i.e. the property is an asset that has its value. This value is what determines the height of the mortgage.
You are probably aware of some of these basic details, which is why, in this article, we are going to focus on the second mortgage. We are going to tell you some essential information about, make a list of its benefits and downsides, and inform you who is eligible for it, and so on.
How does it work?
Basically, the second mortgage uses your property (a house, apartment, and so on) as collateral. It uses the property’s equity i.e. it’s the market value that can grow or decline over time, but hopefully, it should constantly rise.
Let’s say that you have probably taken a loan to buy your house (this is the first loan). Every month, when you make a payment, the amount of money you still own decreases which means that the equity grows. Similarly, another thing that can promote equity is if the value of the home increases because of the real estate market. On the other hand, if the value decreases, you will lose equity.
What are the types of the second mortgage?
Basically, there are two kinds of this mortgage and we are going to discuss both of them. Firstly, there is a home equity loan. What is this? When you get approved for this type of loan, you are going to receive a specific sum of money that you can use however you want to. You will repay it back with regular payments every month over a beforehand agreed period of time. This sort of loan is ideal for people who already know how much money they require.
Why you should go with this one? Firstly, the main reason why people opt for this kind of loan is the fact that they will receive the lump sum instead of smaller payments. Secondly, when it comes to paying it back, these come with fixed interests meaning that there won’t be any sudden expenses.
The second kind is a line of credit. This one works like a credit card – the lender sets a certain credit limit and you can borrow as much money as you need, until you get to that maximum, of course. Initially, there is a draw period that can be anywhere from 5 to 10 years. During this time, you can withdraw any sum you require. After this interval, the payment period begins that can last between 10 and 20 years. During this time, you will have to pay back the principal as well as the interest on the amount you took. Also, you will not be allowed to borrow money until you have paid off the previous debt.
Some of the reasons for choosing this loan include flexibility meaning that you can only use the amount you need i.e. you won’t have the pay back the entire sum, and the fact that you don’t have to start paying it back until you have withdrawn all the funds. When it comes to downsides, the biggest one is the fact that the interest can change based on the market. It can easily grow which means that you will have to repay more money in the future.
Why do people get a second mortgage?
Now that we have provided you with some basic information, let’s discuss why most people opt for taking the second mortgage. The most common reason is paying off a loan. By using this loan to redeem an existing loan, you can save a significant amount of money.
Secondly, people usually use this loan to redecorate their home or make some necessary improvements. Why? Well, simply because this way they are improving the value of the property and plan on paying back the debt after they sell the house at a considerably better value.
Similarly, you can use this loan to make significant purchases and to buy stuff or equipment that you wouldn’t be able to otherwise. In addition, some people choose to get it to pay for school or college. However, if this is the case with you, you might want to investigate student loans since they might be the better option.
Last, of all, the second mortgage is the best way to pay for some sudden expenses that cannot wait. Everything from car damages to health emergencies.
Who is eligible?
As you can assume, unfortunately, not everyone can get the second mortgage. The conditions that one must meet depend on the lender they opt for. Still, most common are proof of employment and regular income, one’s credit score has to be at least 620, the equity of the property has to be 20%, and a debt-to-income ratio of 43% and lower. Click here to learn more about these requirements.
What to consider?
Yes, we can all agree that getting a mortgage sounds great. The lender will give you an exact amount of money you need to invest in something or use however you wish. The best part is that, as it seems in the first place, you will have more than enough time to pay every dime back. However, this is a decision that should not be taken lightly.
You have to understand that no matter the reason why you have stopped making monthly payments, the bank or the lender will take your home. It is just the way everything works and there is nothing you can do to stop the foreclosure.
Secondly, before signing the document, you have to carefully think about the future. As already mentioned, depending on the type of mortgage you opt for, the interest can rise significantly, which means that you will have to pay back more money than you have originally taken. In addition, if something unforeseen happens like you losing your job you might end up in some massive debt.
Even though clearly, you should not give up on getting a second mortgage because of these reasons, you still have to consider them. The best thing that you can do is to plan out every possible scenario, just to be on the safe side.