Second Mortgage Help: What is it & How Does it Work?

Over the past year and a half, the prices of homes in the United States have skyrocketed. On top of that, with the pandemic, building supplies have been scarce, and the number of houses available is far fewer than the number of buyers looking for a home.

This means that many folks are paying higher than the asking price to secure the home they want, and it also means that a number of homeowners have significant equity in their homes.

Because of the tight market, these homeowners are tapping into that equity, and one of the most popular ways to use equity is to get a second mortgage.

In this article, we will look at what a second mortgage is, what you can do with it and if it’s the right thing for you to look into at this time.

What Does Equity Mean

Simply put, equity is the difference between what you owe on your mortgage and what your home is currently worth. So, for example, if you owe $150,000 on your mortgage loan and your home has been valued at $200,000, then you have $50,000 in equity in your home.

Your equity can increase in two ways; As you pay down your mortgage, the equity in your home will rise. And, if the value of your home increases, so will your equity.

To determine the value of your home, you would need to have an appraiser come and look at it. At the time of purchase, the bank will send an appraiser to look at the home and the real estate to determine the value and thus decide on the amount of the loan they will give you.

Other ways of determining your home’s value

Although having an appraiser come and look at your home to determine its value, it is not the only way to find out what your home is worth. Here are a few ways to determine the value of your home.

Online valuation tools
If you search “how much is my home worth” online, you’ll come up with dozens of home value estimators. Technically known as automated valuation model of AVM, last year, according to a survey done by the home buyers program, 22% of Americans used an AVM to discover the value of their home. Although these AVMs are good, they do have some issues.

According to real estate professionals, AVMs found on real estate sites are mainly used for lead generation, and they are built to offer a result no matter how little information is available. In this case, the results are watered down.

There are professional-grade AVMS used by lenders and real estate professionals that employ confidence scores linked to accuracy that will give you an even more accurate picture of how much your home is worth.

Comparative market analysis
If you’re looking for a deeper dive into your home’s value, ask a real estate agent for a comparative market analysis or a CMA.

Note that this is not a professional appraisal, which would be more detailed.

However, it does provide an agent’s evaluation of the home and the market to estimate the value, usually for listing purposes.

Your local real estate agent may provide a CMA for little or no cost. Be aware that they may be doing so because they expect you to hire them when you do sell your home.

Use the FHFA House Price Index Calculator
If an AVM doesn’t appeal to you, the Federal Housing Financing Agency’s house price index calculator gives a more scientific approach to the situation.

The FHFA tool uses millions of mortgage transactions gathered since the 70s and tracks a house’s change in value from one sale to the next. It then uses this information to determine how values fluctuate in any given market.

Hire a Professional Appraiser
Lenders require an appraisal before they approve a mortgage, but you can hire an appraiser at any time.

An appraiser evaluates:

  • Market: The region, city, and neighborhood in which a home is located.
  • Property: Characteristics of the house, including improvements and the land it sits on.
  • Comparable properties: Sales, listings, vacancies, cost, depreciation, and other factors for similar houses in the same market.

They then combine this and other information in a final opinion f the value of your home and deliver it in an official report.

What is a Second Mortgage

A second mortgage is a lien taken out against a property that already has a home loan on it. A lien is a right to seize or possess property under certain circumstances. This means your lender has the right to take control of your home if you default on the loan.

When you take out a second mortgage, a lien is taken out against the portion of your home that you’ve paid off.

The difference between a second mortgage and an auto loan or a student loan is that you can use the money from a second mortgage for almost anything. And second mortgages offer interest rates that are lower than credit cards.

How does it work?

We’ve already explained equity, so you understand that. A second mortgage allows you to use your home’s equity and put it to use immediately.

Approval for a second mortgage will ultimately depend on your lender; however, the most basic requirement is that you have some equity built up in your home.

There are two different types of second mortgages to choose from: a home equity loan or a home equity line of credit. Let’s look at both of these so you can decide which is best for you and your financial situation.

Home Equity Loan
This type of loan allows you to take a lump-sum payment from your equity. When you take out a home equity loan, your lender gives you a percentage of your equity in cash.
In exchange, the lender gets a second lien on your property. You pay the loan back in monthly installments with interest, just like your original mortgage. Most home equity loan terms range from 5 to 30 years, which means you pay them back over that set time frame.

Home Equity Line of Credit
HELOCs don’t give you money in a single lump sum. They work like a credit cards. Your lender approves you for a line of credit based on the amount of equity in your home. Then, you can borrow against the credit of the lender.

You may receive special checks or a credit card to make purchases. HELOCs use a revolving balance, meaning you can use the money on your credit line multiple times. If your lender approves you for a $10,000 HELOC, you spend $5,000 and pay it back. Then, you can use the entire $10,000 again.

HELOCs are only valid for a predetermined period called a “draw period.” You must make minimum monthly payments during your draw period as you do on a credit card.
Once your draw period ends, you must repay the entire balance left on your loan. Your lender might require you to pay in a single lump sum or make repayments over a period of time. If you cannot repay what you borrowed at the end of the repayment period, your lender can seize your home.

What Can You Do With a Second Mortgage

Although home equity loans and HELOCs use your home as collateral, you do not have to use the money for home expenses. If fact, you can use the money for anything you want.

Now you can use the money to build an addition, renovate a kitchen, add a deck, or whatever your house might need or want; however, people also use home equity loans or HELOCs for college tuition, medical expenses, consolidation of debt. The interest rates you’ll pay on these forms of loans are usually a lot lower than rates you’ll pay on any other kind of debt, so you can use them to consolidate higher forms of debt like credit cards.

So if you need money for a big project or a life-changing situation has arisen that requires money, you can use a second mortgage for it. Simply stated, there are no laws or rules that dictate how you use the money you take from your second mortgage.

Think About This

With a second mortgage, you are putting your home up as collateral. If you borrow money against your home and don’t pay it back, your lender could foreclose on your home to pay back the debt. So, if you’re using your second mortgage to pay off credit card debt, be careful you don’t overextend yourself. You don’t want to lose your home and still have massive credit card debt to deal with.

Revere Homes has Prefered Lenders

It’s always good to talk to an expert when matters of money and your home are concerned. There are no better people to talk to about homes, second mortgages, and home equity than the people at Revere Homes.

With Revere Homes preferred lenders, you have experience and understanding of the housing market and how to get the most out of your home equity. If you have questions or just want more information to use in the future, contact Revere Homes’s preferred lenders.

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