Are you thinking about getting a second mortgage? Given the risky nature of these loans, homeowners should be precautious when considering such a step. It requires using one’s house or apartment as collateral unless the loan is paid off within the deadline.
In order to qualify for this type of loan, applicants should have a high credit score and home equity of at least twenty percent. The application process is a nightmare for most applicants, being confused by the number of documents requested for submission.
Nevertheless, second mortgage brokers provide reliable advice and support throughout the entire procedure by gathering documents, getting quotes, and comparing offers.
Learn more about the ways in which these professionals help homeowners apply for such a loan.
Understanding second mortgage
In order for a person to get a second mortgage, he/she is supposed to fully understand the risks of taking such a step. This type of loan is closely related to home equity, as the latter determines the amount of money an individual can take as a second mortgage. This amount is usually a maximum of eighty-five percent of one’s home equity.
Most homeowners don’t possess their residences entirely until they pay off their loans. Consequently, the portion of the residence homeowners have paid for is referred to as home equity. It can be easily calculated by subtracting the sum you owe from the value of your house on the real estate market. Since market value is susceptible to fluctuation, home equity might increase or decrease over time.
Moreover, a second mortgage allows homeowners to borrow almost the entire amount of their home’s equity by using their house as collateral. In the event of not being able to pay off the loan, your house will be used to cover the debt. There is a vast range of mortgage companies, such as https://www.geoffleemortgage.com/mortgage-services/second-mortgage-companies/, helping borrowers overcome their credit issues and consolidate their debts. Consulting such brokers is essential for understanding both the benefits and risks of this decision.
The greatest number of homeowners take out such loans for the purpose of house renovation, paying off debt from credit cards, covering college education expenses, medical bills, etc. Some individuals use money to purchase investment properties, which involves a great deal of risk. Given the fluctuations in the real estate market, both properties are likely to decrease in value.
Choosing a type
Second mortgage brokers assist borrowers in deciding which type of loan is better suited for their financial situation, whether a home equity loan or Home Equity Line of Credit (HELOC). The former alternative means receiving a certain sum of money determined by the equity. This sum is paid back to the lender on a monthly basis over a long period, between five and thirty years. The greatest thing about these loans is the fixed interest rate.
The latter alternative is closer in resemblance to credit cards, as borrowers can withdraw money whenever they need finances. Instead of receiving a lump sum, borrowers only withdraw the sum they need by adhering to the borrowing limit. Besides a borrowing limit, there’s a borrowing timeframe during which individuals are expected to pay off the debt.
Nevertheless, the interest rates of HELOCs are variable, not fixed. It’s paramount for second mortgage brokers to introduce borrowers to the difference between the draw period and the repayment period. In the course of the draw period, borrowers are allowed to pay only for the interest on the amount they’ve borrowed, not the principal. The HELOC draw period typically lasts between five and ten years. Click here to learn more about the difference between a home equity loan and a HELOC.
Furthermore, throughout the repayment period, borrowers are expected to pay off the principal along with the interest. This phase might last up to twenty years, during which monthly payments experience a boost. Any failure to pay off the loan in the repayment phase leads to foreclosure.
Understanding the requirements
After helping borrowers make a choice of a second mortgage type, brokers should make sure they meet the requirements of lenders in order to get such a loan. Keep in mind that lenders are rather demanding when it comes to second mortgages, as they consider these loans risky.
A solid credit score is among the essential requirements of lenders when applying for a second mortgage. It plays a vital role in the determination of interest rates, speaking volumes about the reliability of applicants. In order for lenders to consider an applicant eligible, his/her credit score is supposed to be above 700.
In case your credit score isn’t sufficiently good to meet the requirements of lenders, second mortgage brokers can suggest some improvement methods like paying off the debt of your credit card. Additionally, these professionals collaborate with alternative lenders whose requirements aren’t as strict as those of banks. It’s important for borrowers to settle as much of their debts as possible in order to have favorable bank statements.
Home equity is another crucial factor lenders take into account when reviewing applications. Your broker will help you calculate the equity amount of your house, which is supposed to be a minimum of twenty percent. The majority of lenders ask for the assistance of an appraiser in estimating the market value of properties so as to determine the exact amount to be paid until the end of the repayment phase.
Moreover, lenders require tons of paperwork to be filed by applicants, such as bank statements, tax returns, credit reports, pay slips, etc. Second mortgage brokers can gather all the paperwork on your behalf and ensure documents are submitted within the assigned deadline. They will also obtain quotes from various lenders in order to find the best match. Brokers make sure quotes are compared in detail instead of accepting the first offer that comes along.
Understanding interest rates
Borrowers need to be aware of the interest rates on these loans prior to applying for one. The interest rates on second mortgages are always higher than those of the first mortgage. In the event of foreclosure, the first lien is paid first, which makes second mortgages highly risky.
Moreover, interest rates depend on the type of loan you choose, as well as on your credit score. HELOC interest rates are generally higher due to their variable nature, whereas those of home equity loans are fixed. Applicants with high credit scores are likelier to get lower rates than those with low FICO credit scores.
Make sure you consult a broker before applying for a loan.
Their professional advice is worth gold!