Ann Meisner's Blog
You’ve been paying off your mortgage for 10 years, building equity while making careful financial decisions to ensure that you’re on track to pay off your mortgage. So, all of those payments are essentially money in the bank for you, right?
Not quite. The equity you’ve built toward is home isn’t really accessible until you either fully pay off the home, sell your home and use your equity toward a down payment, or use it to take out a second mortgage.
In today’s article, we’re going to be talking about second mortgages--what they are, when to use them, and when you should seek out other options. Hopefully, by the end, you’ll be able to make a more informed decision.
What is a second mortgage?
A second mortgage is somewhat deceptively named. The process of taking out a second mortgage revolves around using your equity as collateral toward a second loan. That loan amount doesn’t have to be used toward a home, however. It can be spent pretty much at the discretion of the homeowner, as long as you stay within the spending limits of the loan terms.
Why take out a second mortgage?
Homeowners typically take out a second mortgage when an expense is tossed their way, whether foreseen or unforeseen. It could be a costly house or vehicle repair, a child’s education, or any other large expense that you might not have been aptly prepared for.
Types of second mortgages
There are two main types of second mortgages that homeowners qualify for. First is a standard home equity loan. You receive a fixed-rate loan that usually paid off over a loan term of 15 or 30 years.
The other type of second mortgage is a home equity line of credit (HELOC, for short). A HELOC is similar to a credit card in that you are approved for a certain amount but don’t need to spend the full amount.
Risks of home equity lines of credit
This type of loan is ideal for expenses that you maybe don’t know the full cost of. However, there is an inherent risk in taking on an expense that might go over the credit limit of your HELOC.
Just like with credit cards, interest rates vary. However, the interest rate is linked to something called a “benchmark rate.” When interest rates for the benchmark increase, so do your HELOC rates.
Aside from the variable interest rates, HELOCs can also prove to be difficult to manage for people who are already in credit card debt. So, it’s only recommended that you take out a HELOC if you are sure that you can stay on top of your monthly payments and are in good standing with other credit lenders.
Risks of home equity loans
Standard home equity loans aren’t without their own risks. For one, you’re putting your house on the line when you take out a second mortgage. So, before taking out a home equity loan on a new expense, be sure that you can manage that expense or you could risk losing your home.
Having a second mortgage can also make it difficult to refinance your home loan, which could cost you in the long run if it would otherwise pay off to refinance.
Benefits of second mortgages
Second mortgages do have their time and place. Home equity loans, for example, can help you achieve a lower interest rate than a typical loan if you have a great deal of equity built in your home. This could make the most financial sense over the long term.
Similarly, a HELOC might be a better option than a credit card for homeowners who don’t have a credit score high enough to land them a good interest rate.
It’s hard to overstate the importance of credit scores when it comes to buying a home. Along with your down payment, your credit score is a deciding factor of getting approved and securing a low interest rate.
Credit can be complicated. And, if you want to buy a home in the near future, it can seem daunting to try and increase your score while saving for a down payment.
However, it is possible to significantly increase your score in the months leading up to applying for a loan.
In today’s post, we’re going to talk about some ways to give your credit score a quick boost so that you can secure the best rate on your mortgage.
Should I focus on increasing my score or save for a down payment?
If you’re planning on buying a home, you might be faced with a difficult decision: to pay off old debt or to save a larger down payment.
As a general rule, it’s better to pay off smaller loans and debt before taking out larger loans. If you have multiple loans that you’re paying off that are around the same balance, focus on whichever one has the highest interest rate.
If you have low-interest loans that you can easily afford to continue paying while you save, then it’s often worth saving more for a down payment.
Remember that if you are able to save up 20% of your mortgage, you’ll be able to avoid paying PMI (private mortgage insurance). This will save you quite a bit over the span of your loan.
Starting with no credit
If you’ve avoided loans and credit cards thus far in your life but want to save for a home, you might run into the issue of not having a credit history.
To confront this issue, it’s often a good idea to open a credit card that has good rewards and use it for your everyday expenses like groceries. Then, set up the card to auto-pay the balance in full each month to avoid paying interest.
This method allows you to save money (you’d have to buy groceries and gas anyway) while building credit.
Correct credit report errors
Each of the main credit bureaus will have a slightly different method for calculating your credit score. Their information can also vary.
Each year, you’re entitled to one free report from each of the main bureaus. Take advantage of these free reports. They’re different from free credit checks that you can get from websites like Credit Karma because they’re much more detailed.
Go through the report line by line and make sure there aren’t any accounts you don’t recognize. It is not uncommon for people to find out that a scammer or even a family member has taken out a line of credit in their name.
Avoid opening several new accounts
Our final tip for boosting your credit score is to avoid opening up multiple accounts in the 6 months leading up to your mortgage application.
Opening multiple accounts is a red flag to lenders. It can show that you might be in a time of financial hardship and can temporarily lower your score.
If you're getting ready to put your home on the market, one of the best things you can do is adopt a "go with the flow" attitude!
Unless market conditions are ideal and all the stars are in perfect alignment, there will probably be a few ups and downs on the road to getting your house sold!
In all probability, there will be encouraging days and a setback or two, but with the help of a resourceful real estate agent and a little planning on your part, good luck is sure to come your way! What do we mean by the word "luck" in this case? The answer to that question can be found in a quote by the ancient Roman philosopher, Seneca: "Luck is what happens when preparation meets opportunity!"
While a proactive real estate agent will create opportunities to attract potential buyers and present your home to its best advantage, the "preparation" part of the formula will mostly be up to you. Here are a few tips to help you make the most of that "window of opportunity" that opens up as soon as your agent puts your house on the market and plants a for sale sign in your front yard!
Curb appeal: Making a great impression from a street point-of-view can be one of your most effective forms of advertising. When your property looks neat, well maintained, and nicely landscaped, you'll be sending a positive message to potential buyers. By showing people that you have pride in ownership, they'll realize and appreciate the fact that your home has been well taken care of. Some homes require more preparation than others to convey that image, but when you pay attention to details, the desired results often follow.
Home staging: Staging your home for maximum impact involves strategies like arranging furniture in conversational groupings. In other words, if the configuration of your furniture lends itself to socializing, relaxation, and comfort, you'll be sending a positive message to people about the desirability of your home. It's also to your benefit to convey a feeling of spaciousness, cleanliness, and good taste. Although everyone has different taste when it comes to decorating, your real estate agent can offer helpful tips, based on their experience, objectivity, and training.
Most upgrades, repairs, and improvements to your house can potentially increase the chances of selling your home within the shortest period of time. Your agent can help you prioritize tasks you need to do to make a favorable impression on house hunters. They will provide you with professional advice on factors like cost effectiveness, urgency, and putting your best foot forward. In many cases, there are simple and relatively inexpensive measures you can take to improve your home's marketability, eye appeal, and perceived value.