Sunday, May 10, 2020

How to Determine If Now Is the Right Time to Take Out a Second Mortgage on Your Home

One of the benefits of owning a home is that you can borrow against the equity that accrues in the property. In many cases, the interest rate on a home equity loan or line of credit is similar to the one paid on your first mortgage. While it may be helpful to have access to your home's equity, there are many issues to consider before you take out a second mortgage.

Will You Be Able to Repay the Loan?

When you obtain a second mortgage, the lender will put a lien on your property. If you fail to make a loan payment on time, there is a chance that the lender could foreclose on your home. This may be true even if you are currently on your first mortgage. Therefore, it is important to know that you can repay the loan in a timely manner before deciding to tap into your home's equity.

Do You Have Any Other Loan Options?

It may be worthwhile to consider whether you have any way to borrow money without putting up your home as collateral. Depending on your credit score, it may be possible to make a purchase or pay a medical bill by obtaining a new credit card. 

It isn't uncommon for credit card companies to offer 0% interest for up to 18 months for new customers. You might also be able to obtain a personal loan from a bank or from a family member without using a home or other assets as collateral.

Do You Have Sufficient Equity in Your Home?

Typically, second mortgage loans are only available to those who have at least 20% equity in their homes. However, most lenders won't approve your application or offer the best possible loan terms unless you have at least 50% equity in a house.

Economic Conditions Can Change Quickly

A change in market conditions could mean that your home is worthless in the future than it is today. That may mean that your home is worth less than what you owe on it, which could make it difficult to sell. Furthermore, a weak economy could result in a job loss or a loss of income even if you remain employed, which can make it harder to pay your loan back on time.

If you are thinking about taking out a second mortgage, it may be a good idea to speak with a loan officer or financial adviser. This person may be able to explain your loan options and whether borrowing money is in your best interest.

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