Advantages of Borrowing Through a Second Mortgage
Owning a home is more than a great investment. It is also a source of valuable funding when it comes to pursuing other financial opportunities. Here we look at the power of a second mortgage, what it means, and it many advantages.
What is a second mortgage?
A second mortgage is a loan that allows you to borrow from the equity in the home, which is how much your home is worth minus your first mortgage or other loans you have against it. Equity can go up or down over time. Equity goes up when you make monthly payments on your loan, which reduces the principal loan balance. It also goes up when the real estate market improves or the value of your home increases. Equity goes down when your home loses value or you borrow against it and you essentially own less of the home.
What does a second mortgage look like?
A second mortgage can be a lump sum loan that you might take out for a specific purpose – a wedding, home improvement project, debt consolidation or other significant financial investment, even a second home. Also known as a home equity loan, you pay the bank back over time with fixed monthly payments, with a portion of payments going to interest and a portion going to the loan balance.
A second mortgage is also available in the form of a line of credit. With a line of credit, the financial institution (FI) allows the available balance of money to be withdrawn and you can continue to draw from it until you reach your maximum limit. There are also revolving lines of credit, in which the financial institution makes more funds available as you pay it off based on your payment history. With both types of lines of credit, you do not have to tell the FI what you’re using the funds for, and you do not have to access the full amount of the loan if you don’t need it. Lines of credits are a good source of funding for open-ended expenses like health care or college tuition.
Why borrow through your home?
Funding and flexibility. Second mortgages are popular financial tools because they give people access to significant funds, often more than what is available through a credit card. Through some lenders you can borrow not just how much you have in equity, but up to 80% of your home’s value. And, with a home equity line of credit, you can use the funds when you need them and for whatever you need them for.
Favorable interest rates. Another reason to borrow through your home is that second mortgages often feature interest rates lower than other loans and credit cards. Because you are securing the loan with your house as collateral second mortgage interest rates may often be less than borrowing from a credit card.
To get a second mortgage, a great first step is your financial institution. They can provide an overview of their home lending products and help you choose which one is for you. If you have a good credit score, low overall debt, and enough equity in your home, you will likely be a good candidate. However, just because you qualify does not mean it is the best loan. You will want to look at the interest rate, term, and any penalties.
Another important component involves closing costs and points. These are an added expense that need to be factored in when you are weighing the overall cost of a second mortgage. Just as with your first mortgage, closing costs are collected at the time you sign to “close” the loan. These costs can include attorney fees, fees for a title search, title insurance, taxes, lender fees and sometimes additional homeowner’s insurance, but these fees can vary based on your lending institution and where you live. The buyer, or in the case of a second mortgage, the homeowner, is usually responsible for most closing costs, which can vary based on the bank and where your live. Some fees are fixed like the recording fee or the transfer tax fee that is charged the state or local government, but others like the lender feeds can be negotiated.
A second mortgage is a popular way to use the power of one of your biggest assets to make other financial opportunities happen. To learn more about options for a second mortgage contact your local team at M C Bank.