How to Apply for a Second Mortgage

If you own real estate and you need cash for whatever reason, it makes sense for you to consider applying for a second mortgage. The terms of second mortgages are far longer than most others, so the monthly payment is lower. And in most cases, the interest you will be charged is significantly less than if you were to borrow the money with no collateral. Finally, the interest that you will pay on most second mortgages is deductible on your federal and state income tax returns.

Do your homework before you apply. Make sure that you have enough equity in your home to support a second mortgage loan. First, determine what you still owe on your first mortgage, then try to estimate the value of your home and then compare the two figures. Second, after having determined your available equity in your home, compare it to the amount you want to borrow. If the available equity exceeds the amount you are about to borrow, make an application.

Understand the difference between a home equity loan and a home equity line of credit (HELOC). If you qualify for a home equity loan, you will receive the proceeds of the loan immediately, it will probably have a fixed rate of interest and you will make the same monthly payments until it's repaid. However, if you opt for a HELOC, you will be able to write checks against that loan and you will make monthly payments based on your outstanding loan balance. Also, the interest you will pay on a HELOC will vary according to market conditions.

Shop around for the lowest rates before you make application. Also, many lenders have large fees associated with their home equity loans and HELOCs, including the cost of appraisal, while others do not.

Come prepared once you have decided on a lender. Have copies of your last two federal income tax returns and a recent pay stub. In addition, you will need to allow the lender to check your credit with one or all of the three credit bureaus. And in some instances, you might even have to allow the lender to contact your employer to verify your status.

Know the downside of borrowing money and securing the loan with a second mortgage on your home. If you should fall on difficult financial times when it is impossible to make payments on your loan when they are due, you will run the risk of the lender foreclosing on your home. So be sure that you really do need the loan and have researched the possibility of renegotiating your existing first mortgage, particularly if you could pay a lower interest rate and have payments that would be less than if you were to get a second mortgage loan.


About the Author

Bill Herrfeldt specializes in finance, sports and the needs of retiring people, and has been published in the national edition of "Erickson Tribune," the "Washington Post" and the "Arizona Republic." He graduated from the University of Louisville.