Deciding on what kind of a house you want to buy is only the first step towards actually owning it. The next is to decide on the kind of mortgage you would pay and also from where you can secure the loan. A mortgage is a loan which generally takes years to clear off, the minimum usually being 15 years. However, since life itself holds many unforeseen circumstances from time to time for us, meeting those extra expenses on a monthly salary may just not be enough. What would be the best option to take in such a scenario?
As you keep paying off the mortgage of the property, the value of your house will only increase. The value in retail estate terms is known as equity. When you apply for a second loan, or a second mortgage, one of the first things that any moneylender would look
at is how much mortgage have you already paid and just how much is yet to be cleared. The more mortgages you have paid would be a big influencer on how much money you will be loaned again.
Here are some tips on what to look at in your second mortgage deal :
- Firstly, the need for a second mortgage would not arise if you have opted for a house that you can pay for comfortably. Most people go for houses with very huge mortgages that take years to pay off. If you make your purchase decision wisely, with the information at hand, it would actually save you a lot.
- Knowing what your credit report looks like is important. That is the report that banks and moneylenders look at when giving you a loan. Being aware of your own credit score would help you in deciding your finances better. The better your credit score, the higher the chances of getting loans faster.
- Other options such as tracking down lenders, who will finance the down payment as well as the closing costs for you, could also be looked at. If you are lucky, the seller of the property might also be willing to finance part of the loan for you.
- With a little bit of searching you might find that there are loans in the market which have wonderful payback options such as interest only payments, full amortized payments, minimum payments etc.
The common mistake that most people make while taking a second mortgage is that it is at the end of the day still a loan that needs to be repaid. It is easy to apply for a loan with a huge amount, but it could take longer to pay that back. Also, in this case, the property is still being used as a security and failure to pay back on time would only lead to seizing of the property by the moneylender. In cases of home equity loans being taken which exceed the actual market price of the property, there is bigger risk if losing the money. On the other hand, the lender is actually taking a small risk as he hopes that the property would only increase in value, and with repayment of the loan, the property would regain some of its lost value. Most lenders would be very wary of a bad credit score, and would want to give loans to only those who are credible in nature. Home equity loans in most cases tend to come with higher interest rates and shorter repayment periods.
Taking a home equity loan comes with its own advantages and disadvantages. It is always best to have a financial advisor who could guide you properly on such matters. Moneylenders in their bid to give you a loan may just not give you all the details that you need. It would not make sense to pay a very high interest rate if the first mortgage also has a high interest rate. Advisors would always tell you to clear up any other loans you may have and to ensure that you do not have too many expenses that need to be paid off each month. Reducing the number of credit cards you have is a good start. Understanding carefully the interest rates that you would be paying for the next few months or years, and also taking a look at the closing costs would go a long way in better decision making. Keeping proper documentation is a must as it can be referred to time and again. The amount of money you get on your home equity loan to a very large extent depends on how much you have already paid off, so if the expense that is coming up is somewhere in the future, planning beforehand could get you a good deal. Examples are a wedding in the family or keeping aside some savings to send your children to college.
Some people would not advise putting up your property as collateral time and again as it takes that much longer for the property to regain the lost value. The more number of loans you take against it, the more risk you actually face of losing the property itself due to non timely payments of the loans. So thinking carefully about this decision is a must. Moreover, lenders will always prefer people who have a steady income and also where two members of the family are working. Keeping a check on your monthly expenses and preparing a check list which has all your future expenses listed, would help you make a decision as to whether you really need a home equity loan or not. If you are still confident about the situation, do a bit of research and find the best moneylender you can. In fact, taking help from the moneylender who lent you the first mortgage loan might also help you get a good deal. If the circumstance is such that you feel you would not be able to take such a huge loan and pay it back in time, going for an unsecured loan from a bank where you do not have to put up anything as collateral might save the day. However, whatever your decision is, be realistic about it.