How to Deal With Second Mortgages

The equity in your home could qualify you for a second mortgage.

Second mortgages allow you to borrow money based on the equity you've built up in your home. You can use this money to make home improvements, pay off debt, pay for schooling, or anything you want. Taking out a second mortgage can help you consolidate bills. But you need to be able to continue paying on both your first and second mortgages. If you decide to sell your home, you'll need to pay off both mortgages from the proceeds of the sale. And defaulting on your second mortgage puts your home at risk, since the home is collateral for the loan.

Things You'll Need

• Budget

Instructions

1. Determine the type of second mortgage that's right for you. A regular home equity loan, gives you a set sum of cash when you close. A home equity line of credit, or HELOC, establishes a credit line. You can borrow as much or as little as you need from the HELOC, provided you stay within your credit limit, but you're not required to take out all the money at once, and you only make payments based on what you borrow.

2. Find out how much you can borrow in a second mortgage. Lenders' rules vary; but in general, your first mortgage and your second mortgage can't add up to more than a percentage of your home's value, set by the lender. This may range from 70 percent to 95 percent. The amount you can borrow will also depend on how much equity you've built up in your home. If you haven't been in your home very long, or if home prices in your area have fallen, you may not have enough equity to qualify for a second mortgage.

3. Budget to make the payments on both your first and second mortgages. If you're paid twice a month, you may want to request a payment date for your second mortgage that's different from the due date for your first mortgage. Or you may need to set aside money from each paycheck to cover both payments. Some mortgages allow you to set up automatic withdrawals from your bank account to make the mortgage payments.

4. Contact your second mortgage lender right away if you're having trouble making your payments. Let them know your situation and try to work out a solution that will allow you to keep paying both the first mortgage and the second mortgage. You may be able to make interest-only payments for a while, or refinance to a lower interest rate.

References

• University of Maryland University College: Second Mortgages or Equity Loans
• Bankrate: Second Mortgage Still Attainable