When Is A Second Mortgage Loan Useful? Some Tips

Currently, the mortgage interest rates are rising steadily, and many homeowners are looking for a way to lock in a currently low interest rate instead of paying for the higher rates of tomorrow. You can refinance your adjustable rate mortgage or your variable interest rate home equity line of credit (HELOC) into a fixed rate second mortgage while the interest rates are still bearable.

You can end the worries by refinancing your first mortgage with a second mortgage, or by refinancing your line of credit with a second mortgage. A second mortgage is similar to a first mortgage – you borrow money against your home. In the case of a second mortgage, you can borrow money on the equity you’ve built in your home or simply refinance your mortgage with a new one, with a fixed interest rate. If you can get one point less on your interest rate, the savings you’ll make in five years will be well worth your time and effort in the years to come.

Many people use second mortgages to pay off other debts as well. Because second mortgages have considerably lower interest rates than standard loans and credit cards, homeowners borrow against their equity to pay off other debts that have higher interest rates. Credit cards can have an interest rate as high as 29 per cent, while a second mortgage comes in under 10 per cent. You can plainly see that a 19 per cent savings on your credit card bills would amount to serious money saved. Standard loans also carry higher interest rates than second mortgages do, so if you’ve taken one out you may want to consider taking a second mortgage to pay off the loan.

Homeowners also have another use for second mortgages, and this one is even better than the rest. You can borrow money on the equity in your home to increase the equity in your home with home improvements. By borrowing funds to improve your home, you’ll increase the value of your home, and therefore your equity. This can be a great way to improve your home and increase the value, which in turn, will give you more equity to borrow against if you need it.

Before you head to a lender seeking out a second mortgage, there are a few preparations you should make.

• First of all, you need to decide why you need the second mortgage – is it to refinance a variable rate second mortgage or line of credit, pay off other outstanding debts or loans that carry a higher interest rate or to improve your home? The lender will want to know what you plan to do with the money, and having a plan may help to get you a better loan in the long run.
• Secondly, you should get a copy of your credit report from all three credit reporting agencies, TransUnion, Equifax and Experian. Check through each of the credit reports for any errors or inaccuracies – such an error could cost you more in interest rate and could even mean your credit being denied.
• Know the current mortgage interest rates and have a basic idea of whether they are going up or down. By arming yourself with this knowledge, you have more of a bargaining power when you are talking to lenders about a second mortgage.
• Talk to a few different lenders and types of lenders when shopping for a second mortgage – a bank, a credit union and a mortgage lender will all offer very different terms and rates, so find out which one is the best for you and will save you the most money. Each lender will have a different fee or point level that they will charge you for their services. One point is one per cent and anything over and above five points from the lender is expensive.
• Keep in mind that most lenders will allow you to borrow up to 85 per cent of the value of your home with the total of your mortgages (first and second mortgages). Some lenders will allow you to borrow up to 125 per cent of your home’s value, and if you are planning to use the money for home improvements that will increase the value of your home, this can be a very helpful option.

Understanding the Difference

Just like when you were looking for your first mortgage, you should do some comparison shopping and ensure that the product the lender is trying to sell you is the right one for you. The whole concept of a second mortgage is to save money on your first mortgage or to borrow funds to increase the value of your home – not spend more money or over-borrow funds. Over borrowing on the value of your home is a quick way to get in over your head and end up losing your home. Talk with a variety of lenders and brokers so that you can be sure to get the best possible deal. In most cases, there are no additional fees for talking with a broker, and since they can offer you several quotes at once, you may want to work in that manner.

After you’ve created a shortlist of lenders, it would be best if you asked a few questions of each. Find out if they can guarantee a Good Faith Estimate before you’ve decided to work with them. If they’re a nationally based lender, find out if they have local representatives to appraise the home and offer you help when necessary. Finally, ask about the closing time on your loan.

When you find a lender you’re willing to work with, ensure that they are reputable. You can check with the better business bureau as well as check online to see if there are any comments on the lender. Ask around to friends and family about lenders they have had good experiences with as well.