One of the most common loans for American homeowners in need of cash is a second mortgage loan. These days, they’re becoming more common than ever. Believe it or not, second mortgages were up by 178% in 2021, and there’s no sign of it slowing down.
If you’re thinking about taking out a second mortgage, then there’s a lot you need to know before making a final decision. Luckily, we can help you with that. Let’s talk about taking out a second mortgage in 2022 and what it can do for you.
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What is a Second Mortgage?
Similar to a first mortgage, a second mortgage will use your house as collateral and offer you an amount of money you will then pay in installments over a specified duration. However, the amount you can take out is limited to 80% to 85% of your current home equity, in most cases.
Also, like your first mortgage, you might be able to deduct the interest you pay from your taxes, under the right circumstances. This is especially true if you use a home office for work or use the payment from the mortgage for home improvements.
You can also use the money for a second mortgage for just about any type of purchase. You aren’t limited in your purchase like you are with a first mortgage.
There are many reasons why somebody would take out a second mortgage. Generally, it’s because they need a large sum of cash for a large purchase such as major home renovations, starting a business, or something else. However, some can take out a second mortgage from necessity.
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When Should I Get a Second Mortgage?
Depending on your own financial situation, you may not need a second mortgage. However, here are some general rules to help you understand when it’s time to take out a second mortgage.
When It’s Needed
Of course, nobody takes out a second mortgage just because they feel like it. Most do it out of necessity. However, it’s important to weigh your options first, as there are different loans available for different purposes.
For example, you may benefit from a home equity line of credit (HELOC), business loan, personal loan, or a cash-out refinance if you’re looking to make a large purchase. Generally, we recommend only taking out a second mortgage when it is the best option for the purchase you are trying to make.
Essentially, if you need to make a very large purchase, a second mortgage probably makes the most sense. It offers you access to the lowest interest rates and gives you plenty of time to pay it off, which works out in most cases. However, it’s best to ensure that it’s right for you first.
When You Can Make the Payments
You should only take out a second mortgage if you know you can make the payments for the long term. Even if you strategize and save enough of the loan for a few months of payments, what about after that?
Ensuring that you have a stable enough income for at least a year in advance to cover both your first and second mortgage (along with all other monthly expenses) is critical before applying for a loan.
The only major downside of a second mortgage is the risk of your lender foreclosing your house upon defaulted payments. That’s something you want to avoid at all costs so, if possible, only take out a second mortgage when you know you can handle the additional expenses.
On the other hand, if you are confident you can pay off this loan in a matter of six months to five years, then a personal loan or a HELOC is likely in your best interest, as you won’t need that extra time.
When Your Credit is in Good Standing
Ideally, you want to open a second mortgage when you have decent credit. Second home mortgage rates can vary widely between lenders, but the one factor that’s in your control is your credit.
Think about how important a slight difference in interest really is. In the context of a $200,000 loan, a 2% difference may not seem like much, but it’s $4,000. That isn’t pocket change for most people.
Even if you’re paying off that $4,000 over the course of a long time, it’s still the same amount. You would probably go out of your way to save that much on a car loan, so why wouldn’t you on a mortgage rate?
If you have time and taking out a loan isn’t an immediate imperative, we suggest working on building your credit first, as it could save you thousands of dollars.
When You’ve Asked Around
Finally, it doesn’t hurt to talk to a mortgage company or mortgage lender about your financial situation and to take a look at your options. Talking to a loan officer is always a good decision, whether you’re looking for an investment loan or home equity loans. Getting an idea about rates ahead of time will help you make the right decision.
Also, you will want to look into fees, as there will be fees associated with your second mortgage, just like your first. The sooner you start asking around for the best deal, the better.
Shop Around & Save
Now that you know what a second mortgage is and what it could do for your financial needs, there’s no time like the present to start looking for deals. Do your research, stay up to date with our latest financial tips, and feel free to contact us with any questions.