Need Extra Cash: A Second Mortgage May Be Right For You

Whether because of a planned expenditure or an unexpected need, can accessing the equity in your home by taking out a second mortgage improve your financial situation?

What is a Second Mortgage?
A second mortgage is a loan subordinate to your first mortgage, in second lien position, borrowed against the equity in your home and creating two payments each month. Your regular mortgage payment remains the same, and an additional payment is due against the new loan.

Your first mortgage takes precedence over your second mortgage and in the event you default, your first mortgage would be paid off before the second. As a result, a lender views a second lien with more risk, which may mean interest rates, points or fees rise higher than your first mortgage.

Why Take Out a Second Mortgage?
A second mortgage is appropriate when you need a substantial amount of money for:
• home remodeling
• large expenses
• credit card debt elimination
• other debt consolidation

Additional benefits include flexibility and access to funds. Taking out a second mortgage is also a popular method of avoiding private mortgage insurance (PMI) and possibly improving your credit score.

The two main types of second mortgages are home equity loans and home equity lines of credit (HELOC).

Home Equity Loan Vs. Home Equity Line of Credit
A traditional home equity loan is a lump sum loan where the amount is disbursed in its entirety. Select this option when you need all the money up front. These loans offer fixed rates and a set repayment schedule. Typically, home equity loans are written for three to seven years.

A HELOC allows you to take cash disbursements as needed. You only pay interest on the amount drawn, possibly by check, but may be required to draw a minimum dollar amount each time. A HELOC is an excellent tool if you need access to cash, but do not want the entire sum disbursed immediately. If you have a series of home improvements in mind, this may be the appropriate option. The home equity line is usually open-ended and can remain that way for as long as you own your home. Most home equity lines are adjustable-rate, which will affect your monthly payment.

If you are looking for ways to bring focus to your financial picture, consider the benefits of a second mortgage. My team and I would be happy to discuss your options with you.

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