How to Get a Second Mortgage

Second mortgage is the mortgage taken against the equity built on the home. This normally comes with higher mortgage rate as it has less priority than the first mortgage on the house. While it may be a good idea to tap into the equity on the house through a second mortgage, it could be very risky to get into more debt without thinking about the consequences of a second mortgage. Read on to check the factors to consider before applying for a second mortgage and steps to get a best deal on it.

Difficulty: Moderately Challenging

Instructions

1. Determine if you really need a second mortgage. This is very important step. A second mortgage should be taken only for critical matters such as paying of high interest debt, investing in a business with high return potential, remodeling your home to increase its market value etc. Don't go for a second mortgage just because you need money to spend.

2. Get the house appraised and find the current market value. The amount of loan you get mainly depends on the equity on the house. Normally lenders give the mortgages such that total( first + second) mortgage on the house doesn't exceed 85% of the current value of the house( there are exceptions to this rule). If you don't have significant equity, second mortgage is not worth the pain.

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   second mortgage

   Shop around for the best rate. Once you decide to go for a second mortgage on your house, don't just grab the first loan offer you get. Ask for free quotes from different lenders. Compare them side by side and pick the best rate you get. Keep in mind, second mortgage interest rates are higher than the primary home mortgages.

4. Calculate the monthly payment for both first and second mortgage and see if you can afford the payment. As a rule of thumb, monthly house payment should not exceed 25% of your take home income. If you end up taking second mortgage and fall behind on the monthly mortgage payment you will be risking your house.

5. Check the loan terms, costs and penalties. Not all loans are created equal. Check the closing cost or any other fees involved. Some lenders charge prepayment penalties for second mortgages. So, understand what you are signing to, before you go for a second mortgage.

6. Proceed with the loan. Once you select the lender and understand the loan terms, commit to the loan, complete the paper work and get the loan.

Tips & Warnings

• If you are planning to refinance your first mortgage, stay away from second mortgage. Having a second mortgage makes process of refinancing very difficult.