How Does a Second Mortgage Work?

Odds are, you used a loan to purchase your home. But did you know your home can be used as collateral to obtain a different kind of loan?

Second mortgages might seem confusing to some but there are some benefits when used wisely.

Here’s a simple breakdown to help explain and answer the common question: how does a second mortgage work?

How Does a Second Mortgage Work?

Your home is a major asset and, unlike t.v. celebrities with major net worth, this asset may be all you have to receive needed funds.

In time, your home can increase in value. A second mortgage, to put things very simply, is a kind of loan.

Second mortgages basically allow you to borrow money, obtain a loan, against the value of your house. This type of loan enables you to use this asset (your home), to receive needed loan money without having to sell your home.

You can use a boq home loan calculator to determine the size of the loan your home may be worth.

When you’re working with a bank or lender, they may refer to a second mortgage as a home equity line of credit.

How it Works

Risks- When considering taking out a second mortgage, it’s important to realize, (as mentioned above), that your home will be your collateral. This means that if you are unable to repay your loan or make payments, your home will be at stake.

Unfortunately, missing payments on your second mortgage could result in foreclosure. This can be devastating to families.

Generally, it’s wise to avoid a second mortgage for things categorized as “current consumption costs.” These are nonessentials like entertainment or other basic living expenses.

Role of Equity- Second mortgages are made possible because ideally, the equity in your home will have increased in value over time as you have made mortgage payments against the initial loan you received to purchase the home.

That initial loan to purchase was your first mortgage.

The equity in your home may change in different ways. They include:

1. If your home loses value. This can happen if the market crashes, your home becomes seriously damaged, new homes are built nearby, your home becomes outdated or problematic, etc. etc.

Your home may also lose value and thus decrease your equity in it if you borrow money against your home.

2. You can increase the equity of your home by making renovations, improvements or repairs. It can also increase if the housing market takes an upward turn.

3. Another great way to improve the equity of your home is to make regular mortgage or loan payments on time. As you do this, your equity grows.

Is a Second Mortgage for Me?

How does a second mortgage work? It can come in various types including rate choices, line of credit, or lump sum.

Be sure to do your research. Consider the pros and cons, as well as the value of what you plan to use the loan money for.

After all, we don’t all have a huge personal net worth like ‘Gold Rush’ star, Tony Beets to rely on. Choose wisely!