A second mortgage means that the buyer is taking out a loan on an already mortgaged home or building, and it is a way to consolidate debt which will help you make the loan, and you still hold the first mortgage. But how do you decide if you need it and how would you go about getting one?
Why you would need it:
- For home improvements: If you’re planning to make any renovations or improvements to your house, a second mortgage can be taken out to fund the work and keep your house on the market for potential buyers.
- Personal projects: The funds from a second mortgage can be used to your benefit as well as your home’s, used to put a kid through college, fund a significant purchase such as a new car, to purchase a new home or start a business, or just to have some extra cash in the case of an emergency.
- Consolidating debt: Second mortgages can also be used to consolidate debt from credit cards and personal interests into a loan which can give you lower interest rates on your home which also lower risks for banks’ lending you money. Debt consolidation also lowers interest rates and improves your credit scores.
How you should apply:
- Talk to a bank or mortgage broker: This is where trust and transparency, as well as good experiences with your broker, come in handy because you’ll be using the same broker or bank as you did with your first mortgage to figure out how much money you have for the second mortgage.
- Understand the risks: Lenders will look at several factors when thinking about approving you for a loan, including your equity, income, and credit score. High values for each of these decrease the risk for a potential lender and increase the chances of your approval. Lenders for second mortgages often try to minimize the risk to themselves, so they don’t lose money, so by being a low-risk client, you can get a second mortgage much faster.
- Plan ahead: Take care to look at the agreement and make sure you completely understand what you as a buyer are getting into. Paying two mortgages at the same time is a lot to juggle, so make sure you have a steady source of income and some funds to spare in case of an emergency. Second mortgages are often paid off quicker than a first mortgage, so be prepared for all outcomes.
Second mortgages, while a bit of extra work, can give you some additional funds to improve your life and your home and credit, and who doesn’t want that?