Securing a Second Mortgage for Your Home

Sometimes the need arises when a homeowner needs extra money such as money for college, home improvements, to pay off personal debts, or to start a business. Securing a second mortgage on your home can be a way to get the funds you need.

The second mortgage will be based on the equity you have in your home. The equity is based on the mortgage payments you have made and the increased value of your home.

The interest rate on a second mortgage is usually higher than the rate on a first mortgage and usually has a shorter term. A balloon payment at the end of the loan term may be required.

You can consider refinancing your home instead of getting a second mortgage. The interest rate on a second mortgage is higher than on a first but the time required for securing the loan may take longer than you want. An application for a second mortgage will probably take less time and you will probably have lower transaction costs which may also be less costly than refinancing.

There are three types of mortgages you can apply for as a second mortgage on your home.

Traditional Second Mortgage

The traditional second mortgage can be a fixed rate loan or an adjustable rate loan with terms from 5 to 20 years. The typical loan term is 15 years. The loan limit is usually seventy-five to eighty percent of the appraised value of the home for both loans.

The interest rates on a second mortgage loan may be higher than those of the first mortgage, especially if it is a fixed mortgage loan. Adjustable rate second mortgages will have lower interest rates but higher margins. Second mortgage loans usually close two to three weeks after application. Closing costs are usually two to three percent of the total loan amount. When applying for a second mortgage, you will have to have your home appraised and you will have to have a credit check.

Home Equity Loan

A home equity loan is similar to a traditional second mortgage. Homeowners usually apply for these loans to make improvements or renovations to their home or to finance a business. The home equity loan generally has lower interest rates than the second mortgage loan and the lender can waive closing costs. Most home equity loans are adjustable rate mortgage loans.

Home Equity Line of Credit

A home equity line of credit is usually seventy-five to eighty percent of the home's appraised value. The interest rate will be adjustable. Some lenders will waive closing costs. However, there may be points to pay which adds to the cost of your loan.

The home equity line of credit is used when funds are needed on a periodic basis such as college tuition or to consolidate debt. The requirements for this type of loan is a credit check and an appraisal of your home.

You should determine your financial needs and then shop around for the best mortgage loan possible.