It’s no secret to the vast majority of Americans don’t have the money at hand to pay for a home they want to buy. Home loans provide an easier way for prospective buyers to become homeowners.
Although there’s some stigma around getting into debt, taking out a mortgage is a sound decision. When you mortgage a home, over time the property will increase in value, creating a home equity value for you.
Did you know you can use this equity to get second mortgages? In this article, we are diving into second mortgages, fleshing out everything you need to know.
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Who Can Qualify for a Second Mortgage?
You might think that having a first mortgage automatically qualifies you for a second mortgage, but that’s not the case. Only homeowners who have a mortgage and enough home equity can qualify for a second mortgage.
You see, a mortgage is a secured loan. The home is the collateral. As such, the value of the home must be equal to or greater than whatever amount is being sought in the home loan. As the borrower starts making monthly mortgage repayments and the value of the home starts to grow, the difference becomes the home equity.
Let’s say you have a 30-year, $500,000 mortgage. You’re supposed to pay about $1,400 every month for 30 years to clear the loan.
After paying the loan for 15 years, you would have paid about $250,000. In the same period of time, the value of your home might have grown from $500,000 to $1 million. In this case, you have about $250,000 in home equity.
This means you can qualify for a second mortgage. You can borrow up to around 80 percent of your equity.
That being said, there are things that can disqualify you from getting a second mortgage even if you have home equity. Tax liens on a property, for instance, will discourage lenders from giving you a second mortgage.
Can You Use a Second Mortgage to Buy a Second Home?
If the first thing that comes to your mind when you think of second mortgages is buying a second home, nobody can blame you! But to clear that up, yes you can get another mortgage to buy another home even while you service your first mortgage, but the new mortgage will still be called a first mortgage!
And, can you use a VA loan for second home? If it’s a primary residence, you can, but as long as you’re eligible.
Now, back to the second mortgages we were discussing earlier. You can use the funds you receive from the second mortgage for whatever purpose, so you can buy a second home if they’re sufficient!
Understand How Second Mortgages Work!
Second mortgages are a good option for homeowners who have good equity in their homes. You can use the funds however you wish, but keep in mind that, just like any secured loan, you risk getting the home foreclosed upon if you default on the loan.
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