How to Make an Affordable Second Mortgage on a Home
If you're a homeowner who anticipates borrowing money to cover a large expense in the near future, tap into your home's equity with an affordable second mortgage. The second mortgage will be a "subordinate" lien against your property. That is, it'll be a loan secured by your home, like your current mortgage is, but if you default, repayment of your first mortgage will take precedence over repayment of the second. In order to find the most affordable second mortgage on your home, shop around for the loan with the most favorable combination of interest rate and fees.
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Instructions
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Order a copy of your credit report. You're entitled to a free copy each year. Correct mistakes by contacting the credit bureaus listed on your report to challenge the erroneous negative information. Seek the advice of your creditors about bringing your accounts current if the negative information is correct. According to the Federal Trade Commission, higher credit scores qualify borrowers for better loan rates.
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Decide what type of second-mortgage loan you'll apply for: a home-equity loan or a home-equity line of credit. Consider the implications of the home-equity loan's fixed rate vs. the line of credit's variable rate --and varying payment amounts. The variable rate could be lower at first, but the fixed rate means predictable payments.
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Make a list of several mortgage lenders. Include local banks and credit unions as well as mortgage companies and national banks.
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Contact several lenders, including your current mortgage lender, and ask them to explain the costs associated with the type of loan you want. Write down the features of each so that you'll be able to do a side-by-side comparison later. Inquire about annual percentage rates, points, and how much your monthly payment would be. Ask about upfront fees, too, such as application or processing fees, origination fee, appraisal, attorney fees, credit report costs and documentation preparation. Find out if you'd have an additional amount due at closing.
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Compare the loans. Look at the upfront fees and closing costs of each. These are less of a concern than the percentage rate because they're one-time costs, but if your cash is limited, these costs will limit how much you can borrow. Compare the annual percentage rates, which tell you how much the loan will cost each year.
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Contact your current mortgage bank to see what kind of deal they'll give you. Tell them you're shopping for a second-mortgage loan but want to give them the first shot. Use the information your bank gives as a yardstick by which to measure the other loans. Contact one or two of the most competitive lenders from your list again. Negotiate with each of these "finalists" to get the best deal possible on your second mortgage loan.
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Tips & Warnings
The U.S. Federal Reserve recommends asking your lender to lock in your rate right away once you're confident you've found the best deal.
Be wary of introductory interest rates that seem out of line with the annual percentage rates. The Federal Reserve notes that the discrepancy signifies high fees.
Beware of predatory lenders who pray on borrowers with bad credit. Understand all the features of your loan. Be as sure as possible that it'll be as affordable years from now as it is today.
