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How to Get a Second Mortgage on Your Home
For many people, a home is their largest investment - and potential
source of capital. Getting a second mortgage, or a home equity loan,
can tap that equity for college, home improvements or other pressing
financial needs.
Steps:
1. Determine why you need or want a second mortgage. The level of
need will determine how you proceed with your lenders since it will
define how much you want to borrow against the appreciated value and
built-up equity in your home.
2. Be certain you can afford the additional payments involved in a
second mortgage by running some hypothetical calculations through
a mortgage calculator.
3. Arrange for an appraisal of the home. (A second mortgage, like
a first mortgage, will require an appraisal to determine the home's
market value.)
4. Ask your lender about closing costs.
5. Ask if the lender requires private mortgage insurance (P.M.I.)
on a second mortgage.
6. Ask your lender to determine if you would be better off to refinance
your house rather than to use a second mortgage.
Tips:
Because a home equity loan will rank as a lower or second loan to
your original mortgage, expect to pay a higher interest rate than
advertised mortgage rates.
A second mortgage is literally a loan on top of your existing mortgage,
so it is always advisable to have a solid idea of what your house
is worth compared to what you owe on it.
You will only have interest and principal payments on a second mortgage
- taxes and insurance are only paid once, in your first mortgage.
Sometimes the holder of your first mortgage will be more accommodating
than another lender on a second mortgage, since you are a known customer.
If used wisely, a second mortgage can be used to pay off credit card
balances and other high-interest debt.
Lenders will sometimes reduce, or even waive, closing costs on a second
mortgage. Be sure to ask.
If you have been in the home long enough and have built up enough
equity, you might be better off to refinance your entire house rather
than add a second mortgage.
Warnings:
It is generally a good idea to avoid lenders that are willing to lend
money in excess of your home's value. While it may be enticing to
be able to get your hands on that much money, remember that you have
to pay it back even if the house is never worth that much.
How to Shop for a Mortgage
Unless you have a stash of cash, you'll need to get a mortgage to
buy a home. As of this writing, interest rates are at historic lows,
putting home ownership within the grasp of many more people. Engage
a mortgage broker to shop around for you, or dive in yourself.
Steps:
1. Choose your mortgage rates and payment schedule. A fixed program
keeps the same interest throughout. An adjustable rate mortgage typically
starts out with a lower interest rate but can change, which generally
means that it could change up or down periodically with lower rates
for shorter periods, depending on the structure of the mortgage. Another
option is the balloon payment, where early monthly mortgage payments
are often lower, but then a large payment is required after a certain
number of years. (These are generally chosen by people who know they'll
move within five years.)
2. Calculate how much you can afford to pay every month and choose
your terms. Terms may be for 15, 20, 25 or 30 years. Obviously, a
15-year program lets you buy the house outright in half the time,
but the monthly payment is higher. Choosing a 15-year mortgage will
save you tens of thousands of dollars in interest in the long run,
but the increased monthly cost may be unaffordable. The traditional
30-year fixed mortgage may be the most popular because of the lower
monthly payment. Adjustable interest-only loans are also available
for certain terms with lower monthly payments.
3. "Buy down" the interest rate on a loan. For instance,
paying a point on a loan--expressed as a percentage of the loan amount--may
drop the rate by as much as one-quarter of a percent. Paying points
makes financial sense only if you plan to remain in the house several
years at least, enough time to offset the extra cost by paying lower
interest. Finance the points to benefit from lower rates without paying
for it out of pocket by adding such fees to the loan balance.
4. Get your credit report before you apply. This report is available
from the major credit reporting agency sites, Equifax.com, Experian.com
or TransUnion.com and will be used by your lender to review your mortgage
application. Most charge $12.95 for this service. Make sure any defaults,
mistakes, or missing or outdated information are corrected before
you start shopping for a mortgage. Get changes in writing.
5. Contact the same credit reporting agencies to see your FICO score
(Fair, Isaac & Co., the developer of the dominant scoring software
used in the mortgage market), and to determine how much negotiating
power you have with banks. The closer the score is to 800, the better.
You may only get a single viewing of your magic number, which costs
about $6.
6. Start by shopping where you bank. Your bank or savings and loan
may offer attractive terms for existing customers.
7. Contact a mortgage broker who has access to several lenders and
can quickly compare rates to find you the best deal.
8. Shop online. Many online lenders offer low rates and quick turnaround.
LendingTree.com will send your request out to four lenders for free.
9. Pay particular attention to loan closing costs, which are quoted
once you are approved for a mortgage. These will differ from one lender
to the next and can add considerable expense to obtaining a loan.
Expect to pay anywhere from 3 to 6 percent of the overall cost of
the mortgage. Credit unions often give their members great deals on
closing costs.
10. Review your good faith estimate in detail before signing on for
a loan. Lenders are required to provide you with a detailed breakdown
of all costs associated with the mortgage.
Overall Tips:
Shop aggressively. Mortgage lending currently is exceedingly competitive,
so don't be shy about asking for better terms, especially if your
FICO credit score is 700 or above.
Go over mortgage costs carefully. Different lenders will often call
the same cost by different names.
Be aggressive. If one lender has a lower cost on a particular item,
use that as leverage to reduce another lender's charges.
Watch out for points, which are finance charges that are sometimes
levied in refinances. Each point is 1 percent of your mortgage balance.
While points are often rolled into your loan and have a minimal effect
on monthly payment, they do increase the overall cost of the loan.
Lock in a rate while you complete your mortgage application.
See How to Save Big Bucks on Your Mortgage.
Overall Warnings:
Don't opt for a biweekly mortgage unless your lender confirms that
there are no additional charges to do so. Most lenders will charge
a fee for the work required to process the additional payments.
How to Get a Home Equity Loan
A home equity loan allows you to tap into the equity in your home
to pay for improvements, education, a car, a vacation - it's up to
you. And the best thing is, the interest is tax deductible.
Steps:
1. Make sure you have sufficient equity in your property to draw upon.
2. Contact your financial institution. You already have an established
relationship with this organization, and it will likely want to keep
you as a customer.
3. Contact other local banks or savings institutions that specialize
in home equity loans.
4. Ask a local real estate mortgage broker to recommend lenders.
5. Search for a lender online.
6. Decide if you want an adjustable or fixed interest rate. (Depending
on your credit, your loan-to-value ratio and the lender you choose,
you may not have a choice.)
7. Complete the loan process.
Tips:
During the loan process, the lender will have to order an appraisal
to determine the value of your property. Although you may not have
to pay for the appraisal up front, the cost will run from $250 to
$350, depending on where you live.
The home equity loan is typically a second mortgage and therefore
more risky, so the interest rates will be higher than for a first
mortgage.
Warnings:
Even if you don't complete the loan transaction, you may still be
responsible for the cost of the appraisal, credit report and any other
fees incurred by the lender or broker.
Understand that the home equity loan is secured by your home. Failure
to make payments according to the agreement could result in foreclosure.
How to Get Rid of Private Mortgage Insurance (PMI)
on an Existing Loan
Private mortgage insurance, or PMI, is an additional monthly fee required
by most lenders when your down payment on a home is less than 20 percent.
Here are some ways to get rid of PMI on your existing home loan.
Steps:
1. Read through the loan documents. A loan with PMI (also known as
mortgage insurance, or MI) should include a document describing the
mortgage insurance and providing the rules for canceling it.
2. Maintain a good repayment history on your loan.
3. Request the cancellation of PMI in writing when your equity has
increased to greater than 20 percent of the home's current value (in
which case you'll need an appraisal to verify), or when the loan has
been paid down to 80 percent of the original loan amount. (If you've
paid the original loan down to 80 percent, you can request a cancellation
of PMI without an appraisal.)
Tips:
You can provide an appraisal to your lender (at your expense) to prove
the increase in your home's value.
New laws are in the works to make it easier for the borrower to remove
PMI. An expected change is the automatic removal of PMI once the loan
balance reaches 78 percent of its original value or is at the midpoint
of the loan term.
Removing PMI can save a borrower $500 to $1,500 per year on average.
Warnings:
Unlike mortgage interest, PMI is not deductible.
There may be an initial period during the first two to three years
of a loan term in which PMI cannot be canceled, even if you've accrued
20 percent equity or the home has appreciated in value.
How to Refinance Your Home
Refinancing your home can cut your monthly mortgage payments. It also
may allow you to tap into the equity in your home to pay off other
loans and credit cards - while still deducting your mortgage interest
from your taxes.
Steps:
1. Find current interest rates in most major Sunday newspapers (in
the real estate section) or contact a mortgage broker.
2. Identify the type of mortgage you want - fixed, adjustable or a
combination of the two.
3. Compare the new interest rates to that of your current mortgage.
4. Use the amount you owe on the loan to calculate what the new monthly
payment would be by using a financial calculator or an online mortgage
calculator. You'll need to know the new loan amount (current loan
amount plus closing costs, such as points, title and escrow fees -
unless you plan to pay for them out of pocket - the new interest rate,
and the number of months of the new loan).
5. Subtract your current monthly mortgage payment from the new monthly
mortgage payment; this is your monthly savings.
6. Divide the monthly savings into the total cost of the loan (including
points, title and escrow fees). This is the number of months it will
take to recoup your investment.
7. Determine whether you plan to live in your home longer than it
will take to recoup your investment. If so, refinancing is probably
a good idea.
Tips:
Consider what you are trying to accomplish by refinancing. Do you
strictly want to lower your mortgage interest rate, or do you want
to pay off other loans and credit cards that have higher interest
rates with the equity from your home? If you plan to pay off bills,
you must add up all the monthly payments of your credit cards, loans
and mortgage that you want paid off and compare that to the new monthly
mortgage payment.
Most mortgage interest is tax deductible. Check the Internal Revenue
Service's rules to see whether they apply to you.
You can find an online mortgage calculator at most Internet loan sites.
Warnings:
Although refinancing may seem like found money, particularly if you
are tapping the equity for cash, remember that it will have to be
repaid like any other loan.
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