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When Should You Take a Second Mortgage?

It is everybody's dream to have their own house. That is why banks and other lending institutions offer home mortgages. Mortgages are loans acquired by potential homeowners used to pay of the property or house itself. When taking a home mortgage you are provided information on the amount, the maturity, interest rate and payment methods. These things are important and must go hand-in-hand with your ability to pay off your debt.

What is a Second Mortgage?

A second mortgage is an extra loan taken against the same property used for a pre-existing home loan. It is a subordinate loan and if ever you default or fail on your payments, the first mortgage is prioritized while the second mortgage takes a step back and only gets paid once the first one is done with.

How To Get a Second Mortgage

The process of getting a second mortgage may take two to three weeks. Getting your loan approved takes only a few days. It is the funding of the loan, however, that takes some time. Also, as long as no problem is encountered regarding the title and appraisal of the property then getting a second mortgage will not go beyond the three weeks. To be sure, have a copy of your Form W2 or your Wage and Tax Statement on hand as most lending companies want to know about the borrower's debt-to-income ratio, credit score and employment history before they approve your request for a loan.

When is the Right Time to Take a Second Mortgage?

Homeowners must take advantage of their property's equity, or its real property value. Home equity improves every time payments are made against the loan. Therefore, the smaller the balance on the mortgage loan, the higher its equity or market value is. And while a property's equity is high, it is the proper time to take a second mortgage on that property.

There are a number of reasons why homeowners take on second mortgages. Among them is the need for cash. Second mortgages, if approved, provide the borrower with cash to spend on a variety of things. Some homeowners need cash to fund their children's education, a medical emergency, to pursue a business venture or even to go on a vacation. One of the most common reasons is the need to renovate, refurbish or add a room to the house.

Second mortgages also serve to consolidate debts incurred by the borrower. There are programs out there that make paying off debts a little easier. It works by gathering all entities you are owed to like credit cards, car loans and housing loans and consolidating them, leaving you with one monthly bill and monthly payment.

A second mortgage may be a risky move for homeowners. But with proper handling of cash you receive from a second mortgage, it would prove to be a wise decision. Remember, if you default on all your payments, your house will be in limbo as it serves as the collateral.

Points to Ponder When Taking a Second Mortgage

One important point in taking a second mortgage is to do research. You can talk to people you know who have done so previously. You can also contact a number of banks and lending institutions and gather all the information you need. If you can, make a tabulation of their good and bad points. You must include here the rates and length of payment period.

Also, be aware of balloon payments. Some lenders get away with having the borrower pay large sums of money at the end of the contract. It is always wise to read contracts thoroughly and understand what you are getting into.