Have you been thinking of getting yourself a second mortgage? What is it and what are the things you need to know because signing on the dotted line. A second mortgage, or sometimes called a home equity loan, is a loan that is taken by the homeowner on top of his primary mortgage.
Second mortgage, how does it work?
When you go to your loan originator to take out a mortgage, they will use the property that you want as your collateral. This will be your first mortgage. Over time, as you diligently pay your monthly loan installments, your home's value increases as your loan responsibility decreases. Then suddenly, you decide that you need money to pay for your child's education or probably buy a new car, so you take out another loan which will not be your second mortgage. This can be taken against the home equity of the homeowner. The equity is the difference between the current market value of your property and the mortgage payment that you still need to pay.
Can I borrow using a HELOC?
Home equity line of credit (HELOC) can also be used to fund your second mortgage. This is a credit line that is guaranteed by your home equity. Generally, HELOC interest rates are lower than credit card rates and other unsecured debt rates. As these are secured against the value of your home equity, lenders can give you a lower rate. But also bear in mind that for lenders, second mortgages are riskier as the borrower needs to repay the first loan before the second mortgage. That is why you can only borrow against your home equity.
Think of HELOC as a possible source of revolving funds that you can relatively access easily like a credit card. Although there are some institutions that have stopped accepting HELOC applications because of the COVID-19 pandemic, refinancing can also be a viable option
as lending rates are now lower to help Americans cope with the crisis.
Times are challenging these days, minimum credit requirements have increased, rates are fluctuating, and options that were once available may not be available now. So always check with your loan servicer
for the updated requirements and possibilities.