Second Mortgages: How Do They Work?
Have you ever been in that situation where you wanted a bigger home but did not have the funds to support it? Then a second mortgage might be perfect for you! You might be wondering if banks still support second mortgage and the answer is yes. Most banks and lenders want to see that a certain home has equity before they will consider approving a homeowner for a second mortgage. This is not a surprise since banks nowadays want security that is backed up by solid equity, especially in these kinds of loans.
This article will give you insight on second mortgages, how second mortgages work, and a brief discussion on why you should get a second mortgage.
What is a second mortgage?
Generally, a second mortgage is a type of loan that allows any homeowner to borrow against the value of his or her home. A mortgage loan, also known as home equity lines of credit (HELOCs) is one way of using a certain asset – in this case a home- without actually selling the actual asset.
A second mortgage loan is called a “2nd mortgage loan” instead of first loan, because the purchase loan you use to buy your home is the first loan, thus making the next loan second. In other terms, it uses your home as collateral just like a loan you use to buy an actual home.
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How does a second mortgage loan work?
To better explain how a second mortgage loan works, here is an example:
Let’s say your home is worth $200,000. You currently owe $120,000 on your first loan. Depending on the bank, it might use the 80 percent rule to finance the 80 percent of $200,000, or $160,000 if your credits are good enough.
When the current loan of $120,000 is subtracted, there is a chance you are able to borrow $40,000 on a second mortgage while maintaining a 20% equity as a safety net or cushion. If you do not make payments, the bank will gain a legal right to seize your home.
Why should you get a second mortgage?
When getting a second mortgage, the lender or the bank will ask you why you need a second mortgage. How and what you answer matters to the lender. Here are some reasons a lender might consider:
- Home renovation or remodeling
- Home additions
- Medical emergency