How to Get a Second Mortgage Without Loosing Your House

Many people choose to get a second mortgage to finance home improvements, pay for college or consolidate debts. If you've got significant credit card debt, a second mortgage may be an economically sound alternative to making minimum payments on high-interest credit cards. However, before you consider getting a second mortgage, take a good look at the pros and cons.

Refinancing may be a better alternative to taking a second mortgage if interest rates are low. Conversely, if your credit has gotten worse since you got your primary home mortgage, refinancing may actually raise your interest rate, so getting a second mortgage would be your best choice.

What is a second mortgage?
A second mortgage is a mortgage based on the equity in your home. Equity is determined by subtracting the total balance of your current mortgage from your home's value. Before you get a second mortgage, you'll need to schedule an appraisal to determine the value of your home. If your home is valued at $150,000 and your current mortgage balance is $125,000, then you have $25,000 in equity. The first question to answer in how to get a second mortgage is how much equity you have, and how much you want to borrow.

Second mortgage options.
Some lenders allow you to borrow up to 125% of your home's value, so in the example above, 125% of your $150,000 home would be $187,500. If you owe $125,000 on the home, a 125% loan would allow you to borrow up to $62,500 on a second mortgage. Be extremely careful with 125% loans. If your financial situation changes and you are unable to make your mortgage payments, a 125% loan could leave you with a balance far in excess of your home's value. In many circumstances, lenders can pursue you for the outstanding balance, even if you foreclose or sell your home. Be realistic about your financial status before you consider a 125% loan, and make sure you have a comfortable savings that you could tap if you ever find yourself unable to make your payments.

Conversely, if you have bad credit, many lenders will only loan you up to 80% of your home's total value. In the example above of a $150,000 home with a $125,000 balance, you might not even qualify for a second mortgage with bad credit, as 80% of the home's value is $120,000. Your home would need to be valued higher or you would need a lower mortgage balance in order to qualify. This is not true of all lenders, so if you have bad credit and want to borrow up to 100% of your home's equity, you can probably find someone who will loan you the money. However, it will take a lot of research and you'll likely find yourself with an extremely high interest rate to offset the risk associated with your second mortgage.

Types of second mortgages.
If you choose to get a second mortgage, you have a few different types of second mortgage options. Second mortgages come in two varieties: a home equity line of credit or a home equity loan. A home equity line of credit is similar to a credit card secured by your property. You can borrow up to your maximum dollar amount, repay it, and borrow again within the terms of your line of credit. A home equity loan is like a traditional mortgage; a one-time loan at a fixed dollar amount with regular monthly payments. If you're doing home improvements, a home equity line of credit makes the most sense. You can finish a project, repay the loan, and then begin another project. If you're looking for debt consolidation or education loans, a traditional home equity loan is the logical choice for getting a second mortgage.

Second mortgage borrowers - beware.
As with any loan product, it's important to read the fine print and find out what you're getting before you select a second mortgage. Watch out for balloon payments, or 'introductory' interest rates that increase drastically during the life of your loan. It's extremely easy to be seduced by a low interest rate and fail to consider the difficulty of making higher payments as your rate increases. Also look out for 'voluntary' insurance that inflates your mortgage payments. Before you consider insurance for your second mortgage, check your primary mortgage insurance carefully - depending on the amount you borrow and your primary insurance coverage, you may not need secondary insurance at all. Most importantly - make your mortgage payments. Your home is security against the second mortgage as well as the primary, so the second mortgage holder can claim a lien against your home if you default on your second mortgage. Don't risk loosing your home - if you're not sure you can make the payments, don't get a second mortgage.

As with any mortgage product, you'll get the most out of your second mortgage if you have good credit. Not sure how your credit looks, or need tips to improve your credit? Sign up for our free credit tips newsletter or check out the Credit Secrets Bible.