How to Add a New Home Loan to an Existing Home Loan

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You can add a new home loan to your existing mortgage with a home equity loan. A home equity loan uses the equity you have built in your house, through your down payment and mortgage payments, as collateral for a new debt. This debt can be absorbed by your primary mortgage, or you can keep the two loans separate. While home equity loans provide flexibility in your finances, they can also be very risky.

Things You'll Need

  • Equity
  • Income verification
  • Contact your current mortgage lender to determine the value of your home equity. This will answer the question, "If you sold your home today, how much would you make, and how much would you still owe the lender?" Even if you own a very expensive home, if you have little equity in the home you will not be able to add a new home loan to your existing debt.

  • Determine how much you can afford in additional payments. It is crucial to take this step before you take a loan. Only by evaluating your budget will you learn how much you can actually afford, which is often less than a bank will be willing to lend to you. To budget effectively, your total fixed debts should never exceed 50 percent of your monthly income, and it is advisable to aim to stay below 30 percent. How much do you have left in your budget after your mortgage, student loans, car debts and credit card has been paid? This is the maximum monthly payment you can add through a new home loan.

  • Obtain loan quotes. In this step, you will contact lenders to determine their estimated rates. You will not have to submit a full application to obtain a quote and you should be wary of submitting even a social security number. It is best to just ask about the bank's current rates the bank and the credit level they require in order to obtain a home equity loan.

  • Apply for a loan. Provide a verification of your income through a paycheck or other method. You will submit a credit check and you will also have to verify the equity you have in your current home. Many borrowers find it easiest to use their existing mortgage lender for a home equity loan. Since the lender already has your mortgage application, you may find the process is faster and easier through your existing lender.

  • Negotiate your contract. Aim for the lowest rate while keeping your monthly payments affordable. Be wary of adjustable rate home equity loans, as the expense of these loans is unpredictable. Never be talked into taking a loan larger than you determined you can afford in your budget analysis.

Tips & Warnings

  • If you are over the age of 62, you may be eligible to refinance your home in order to receive cash back for living expenses through the Federal Housing Administration (FHA). This is the only type of home equity loan or reverse mortgage the FHA provides for, and it presents advantages such as fixed interest rates and low financing costs.
  • Many people think they are not risking their home with a home equity loan. However, if you default on your home equity loan, the lender can purchase your primary mortgage and force it into default. This can leave you in a foreclosure situation even if you made your monthly mortgage payments. Home equity loans are very risky and should only be taken with financial discretion. If you find yourself at risk of default because of an adjustable rate or bad contract, check the Federal Deposit Insurance Company's Consumer Financial Rights legislation regarding home equity loans to determine your rights.

References

  • Photo Credit Yagi Studio/Digital Vision/Getty Images
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