When you buy a home for the first time, you’ll most probably apply for a loan which is the first mortgage. Over time, your equity, the value of your home minus the liens of your existing mortgage, increases as you pay off your debt. When the time comes when you want to use your home equity for any reason, you can apply for a second mortgage.
What is a Second Mortgage?
A Second Mortgage is called like so since it is the second home loan you can apply for after the first mortgage. It uses your home as collateral in exchange for tapping into your home equity. Applying for a second mortgage Texas allows you to use it for many reasons. However, since you’re opening up a new home loan, this only means new application, new terms, and new interest rates.
Different Forms Of Second Mortgages
Home Equity Loan.
One can apply for a second mortgage and receive it as a lump sum of cash. You can use this money for a different number of ways. One often needs to pay for the loan with fixed monthly payments wherein you pay for a portion of the interest fees and principal amount.
Home Equity Line of Credit.
Such mortgage type can either have fixed or adjustable rates. When approved for a HELOC, your lender will deposit the funds to your account. You can then use the funds and withdraw a set amount every time you need the funds. This is called a draw in Home Equity Line of Credit. In other words, it is like a credit card wherein you have a limit that you need to pay monthly.
Reasons To Take Out A Second Mortgage
There are many ways people use money from their home equity. Whichever reason you may have when applying for a second mortgage Texas, one must be careful since you’re signing up your home in line. The following are the common reasons lenders will consider when taking out a second mortgage.
- Home Improvement Projects
- Debt Consolidation
- Medical Emergencies
- Avoiding Private Mortgage Insurance
Good Read: Pros and Cons of Debt Consolidation
Other Things You Need To Know About Second Mortgages
- Applying for a second mortgage requires you to provide substantial financial documents proving you have enough home equity, that you’re able to pay off the loan and that you are a good payer.
- Some homeowners will find second mortgages harder to qualify for compared to first mortgages since you’ll need to make sure you have enough equity for the loan.
- If your lender allows you to have a fixed rate, you get to have the same interest rate monthly.
- If your lender gave you a second mortgage with an adjustable rate, the interest rate could change over the lifetime of the loan which makes it crucial for you to know the basis they will use when adjusting the rate.
- There is a risk of foreclosure if you fail to pay off the loan, so you need to carefully consider your options and the pros and cons when deciding over a second mortgage.