If you plan on having a second mortgage, it’s important to be familiar with the benefits it offers. Getting one approved depends on the lender that you plan to work with. You will have to look through the requirements and also have already prepared equity in your home.
Most lenders will be okay with taking out a portion of your equity. However, it also depends on how much your home is worth and what is the remaining balance on your loan with the first mortgage. The result of your second mortgage application depends on how you’ve been paying off your first property loan.
A second mortgage will require you to still have equity left in your home for at least 20% of its total value. You also have to possess a good credit score rating or even higher than 620 for some lenders. If you have a better score, it would mean you could find better rates.
Understanding the Second Mortgage
You can take out a second mortgage on a property that has an existing home loan. The lender you plan on borrowing from will have the right to lien the said property. That means they can have possession of your assets under certain circumstances.
Under your second mortgage, your lien will be taken out from the part of the property that’s already paid off. The good thing about this loan is that you are free to use it for anything else. The interest rates are also lower than compared to credit cards and are ideal for repaying debt.
If you plan on acquiring a second mortgage you need to know that lenders can still take this back if you don’t meet the requirements. If you default on your property loan before it is repaid, the lender can take it back from you.
Benefits of a Second Mortgage
Some homeowners tend to be worried about using their homes to borrow money, but if you know your way through a second mortgage, this won’t be an issue. Below are some advantages you can get once you opt for this kind of property loan.
- Better Interest Rates
Having a second mortgage can give you better interest rates. It’s because you are now securing your loan using your house as collateral. The rates you find for collateral from assets are significantly lower compared to credit card rates.It’s important to choose between going for fixed or variable interest rates. Usually, when you have home equity loans, the rates are fixed, but if you work with a home equity line of credit or HELOC, you will have variable rates.
The loan-to-value ratio (LTV) affects your rate and final cost. When you have a higher LTV ratio, you will get higher rates. One thing to note is that you should always prepare more for fees or additional costs when taking out a property loan.
- Bigger Fund Access
You can access bigger funds when you successfully take out a second mortgage. Unlike other types of loans, you can use your property loan to pay off other loans which is why it’s a popular option for many.Some lenders will even offer to let you borrow up to 80% of the total value of your home. HELOC helps you use these funds whenever you need them and for whatever usage you want them for.
What’s important is that you’re aware of your equity as well as your property’s value. Your financial institution can help you assess your property value as well as suggestions on which lenders fit your financial status the best.
- Lowers Your Monthly Costs
You can use a second mortgage when you’re struggling with your monthly payments. It’s because this option can free up cash and help with debt consolidation. You can bring the amount that you pay monthly for debt down in half.If you pick a longer term, then your second mortgage payment will be significantly lower. On the other hand, if you choose to repay the loan quickly, expect smaller interest rates. This option is great for people who want to lessen the stress of having to pay over their financial capacity.
- Evenly Spreading Out Repayments
Many homeowners struggle with their monthly deadlines. The worst that could happen is that you can’t get out of debt as fast as you want. That’s why with second mortgages, you are given the option to start repaying your debts on a longer term.You can even repay your loan over a 25-year term through a second mortgage. If you ask financial experts, they will suggest that it’s still better to repay loans as quickly as possible. What’s important is that the terms and conditions match your budget.
- Early Repayment Charges
Many remortgages offer early repayment charges and a second mortgage also offers this, but better. These early repayment charges get applied once you move to another property loan in a given period.That’s why even though you have a new property loan with a lower interest rate, you need to check if you have an existing early repayment charge. If you find out that you still have one, then sticking to your existing loan and taking out a second mortgage is a better option.
- No Need For A Perfect Credit Rating
Credit rating is one of the many things that prevent homeowners from accessing the loans they need. With a second mortgage, you have more freedom to access the loan and use it without restrictions.The reason for this is that under a second mortgage, you are working on a secured loan. Having secured loans means you will need to produce collateral to secure the loan. That’s why even though you may not have the highest or best credit scores, you are still eligible for a property loan.
If you have trouble applying for the unsecured loan of your choice, then you could have a better chance with a second mortgage. It’s one of the best choices when you are self-employed and you have a fluctuating income.
Adding More Value to Your Home
It can be tough to find yourself in the middle of a financial crisis. Not all options could be available to you and you also have trouble maintaining your credit rating. A second mortgage solves plenty of your problems, once you have enough equity in your home.
You could come across two types of second mortgages the lump sum and the line of credit option. The former deals with getting your mortgage cash in the form of a lump sum. You can then use the amount to repay any debts that you currently have.
The next type would be a line of credit. This option lets you use the loan only when you need it the most. Its repayment method for this second mortgage is similar to credit cards where you can slowly pay back over a set period.