Good Time For A Second Mortgage Loan

Posted on February 13 By MLP Blog

If you’re a homeowner in need of some additional cash, there are several options available. You can consider cash-out refinancing, which allows you to borrow funds over the amount of your existing mortgage – money that can be used for any purpose. A home equity line of credit or HELOC is another possibility. One of the most popular options is the home equity loan, often referred to as a 2nd mortgage.

In general, these types of loans feature a low fixed rate, and are paid to the borrower in a single lump sum, which is convenient for large-scale expenses such as home improvements or purchasing a new vehicle.

The application process for a second mortgage loan is relatively painless, as lenders work with a simple formula to compute how much you can borrow, and the loan’s rate and terms. Typically, your lender will perform a quick appraisal of the property and check your current credit standing and income status. Paperwork is not overwhelming, but you are applying for a new home loan, so be prepared for some required documentation.

Depending on the amount of equity you have invested in your home, you’ll be offered a loan based on a percentage of the home's total value. Lenders have a fair amount of discretion when deciding how much they are willing to lend, so be sure to take advantage of online comparison services that provide multiple loan offers without obligating you to sign up.

What kind of payments can I expect?

When comparing a second mortgage loan to a HELOC, for example, bear in mind that payments on the 2nd will most likely be fixed for the duration of the loan, while the HELOC’s rate varies, like the APR on a credit card account. Sit down and calculate what type of payments you can afford, taking into consideration your first mortgage, your car and personal loan payments, and your household expenses. Taking on the responsibility of a second mortgage shouldn’t fly in the face of common sense or throw your budget into a tailspin.

Consolidating debt with a 2nd Mortgage

One of the most common uses for a home equity loan is to pay off higher interest balances such as credit card and student loan debt. By consolidating this debt into a single manageable payment, you could enjoy better monthly cash-flow and a sense of control over your finances. But bear in mind that debt consolidation only works if you make a break with old spending habits and don’t run up your credit card accounts again. Otherwise, you could be left with two sets of mortgage payments and credit card payments each month!

Whether you decide on a second mortgage loan or a HELOC, it pays to watch interest rates before signing on the dotted line. You may prefer the stability of a home equity loan over fluctuating HELOC payments, but remember – with either loan – you are using your home investment to borrow. If you don’t proceed with caution and keep spending habits in check, you risk getting further into debt and even the possibility of losing your home.

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