A second mortgage means applying for an additional loan and putting your house as collateral. Second mortgages represent an option for many people, mainly because they’re looking to cash-out the equity of their property. The money can be used to pay for home improvement projects or to pay off any outstanding debt.
It is important for people to understand the risk this entails and how to get a second mortgage to fit your budget. Remember that your status as a homeowner can be compromised by borrowing money against your property.
How does a home equity loan work?
Home equity comes in many forms, but the most common one is the equity loan that works as a line of credit. You’ll have a certain amount of money available and you can choose to use it or not, similar to the way in which credit cards work, only that the limit is based upon your home equity loan.
Once you start using the money, you’ll be bound to follow the schedule for the monthly repayments and any other rules about withdrawing the loan money.
How can I apply for a second mortgage?
The process is similar to the first time you applied for the home loan. The amount that you receive will be proportional to your home equity. Keep present that this process can be lengthy and the creditor will take a look at how steady your income is and your credit score. Interest rates tend to be lower than other forms of loans because since there’s property working as collateral it represents a lower risk for the lender.
What’s the best use for the second mortgage money?
Taking a second mortgage to pay off debt is not a good idea, but if you’re considering it, be careful. Using money from a second mortgage to consolidate debt can backfire and you may end up with a much larger debt than before.
Some people take out second mortgages to do improvement projects for the house, if this is your situation, try to access the second mortgage but as a line of credit, that way you can be more in control of any repayments.
Other uses for second mortgages money is to put it as the down payment for a second house, but it is better when people make the extra effort and save the initial down payment. It will take longer but you’re not compromising your financial position plus it’s easier to sell the property later.
The problem here is that since its a secured loan you’re risking your property and if you are unable to make the repayments you can lose your house. If you need to consolidate debt, maybe other types of loans would be less risky or other sources of income like finding out whether you’re owed some unclaimed PPI.
Fitting a second mortgage within a budget
If the second mortgage already took place it needs to be your top priority financially wise. Remember that interest rates are higher than your first mortgage so maybe a new strategy is needed to handle this adequately.
Your main concern at this point should be to pay off that debt as soon as possible, try to pay a little extra every month so you reduce the actual balance and your money is not consumed entirely by interest.
Ask yourself if you are financially ready to carry on with a second mortgage and the reasons behind it and you’ll see that maybe it is best to wait and save up and pay cash to cover your needs. If what worries you is the outstanding debt you already have make payment arrangements or create a debt payment plan.
Second mortgages can be useful only if you are certain to have the financial means to handle it with responsibility and care. When taking out a second mortgage, it’s got to be a carefully considered decision and you might find it more suitable to speak to a financial advisor who can support your choice.
They will commonly initiate with discovering why you need to take out a second mortgage and how you plan to in your repayments into your budget.