If you have equity in your home, it may be tempting to cash out with a second mortgage. But before borrowers pull the trigger on a new loan, they should consider if it’s the right move for them.
What will you do with the money?
While there are no restrictions on what you do with the money, homeowners typically turn to a second mortgage in a few common scenarios. Often, borrowers use the money to finance a child’s education, pay off credit card debt or meet other financial obligations. In some instances, borrowers use the money to pay for investment properties. However, that can be a risky proposition because a downturn in the housing market can affect the value of both properties. Simply taking the money out to spend isn’t advisable, and borrowers should be aware that a second loan on their home may be problematic if you want to refinance, need a loan modification, or have to sell your in a short sale for less than the amount they owe.
Types of loans
If you’re applying for a second mortgage, you’ll look at two types of products.
- A home equity loan works like a typical mortgage. Fixed-rate loans are available in almost any increment, but the most common are 15- or 30-year loans. Adjustable-rate mortgages are usually available for much shorter repayment schedules.
- The home equity line of credit, or HELOC, works more like a credit card, allowing borrowers to tap a revolving line of credit based on their equity. The loan has a variable interest rate and no set term.
Do you qualify?
Home equity determines if you qualify for a second mortgage because you’re essentially borrowing against your ownership stake in your home. However, you’ll also need to demonstrate that you have enough income to make the payments. And of course, the higher your credit score, the better your chances are of being approved.