A second mortgage is a type of loan that allows you to borrow against the value of your home. The home that you own is your asset, and it gains more value over time. A second mortgage which is also known as home equity lines of credit (HELOC) is a way to use this asset without selling it.
The second mortgage utilizes the equity in your home, which is the market value of your home relative to any loan balances. The equity typically grows over time and is an efficient way for homeowners to make use of the value of their home to gain financial stability. Your purchase loan is your first home mortgage and hence this loan is called a second mortgage.
Why should you refinance a second mortgage?
There are various factors that homeowners may consider when making a decision of whether they should refinance their 2nd mortgage or not. Some of them include
- Interest rates have gone down
If the interest rates have gone down since the time you took out your second mortgage, it makes sense usually that you want to shift to a lower interest rate. It will decrease your monthly mortgage payments and will save you money over the time. But you have to consider the refinancing costs as well before making any final decision.
- You want to change the term of the loan
It is possible that you decide to change the term of your home loan from 30-years fixed rate mortgage to 15-years mortgage to get more favorable mortgage terms. A shorter-term mortgage typically offers a lower interest rate.
- Home Improvements Projects
Home owners may want to spend their second mortgage on the right upgrades to their home which will ultimately increase the market value of their home.
- Paying for Education
Some homeowners may want to take out their second mortgage to pay for their own or their kids’ educational expenses. But it is important that you consider all the pros and cons of refinancing before you take out your second mortgage.
- Avoiding Private Mortgage Insurance
Some home buyers opt. for a down payment less than the recommended 20%. They may want to opt. for another mortgage. This allows them to avert from paying premium PMI.
- Your Credit Score has improved
If your credit score has improved significantly since the time you took your second mortgage, refinancing your mortgage can allow you to get a lower interest rate. This will decrease your monthly mortgage payments and can save you thousands of dollars over the time.
- Avoiding taking out a personal loan
Some homeowners opt. for a second mortgage to avoid personal loans and save on higher interest rate. A home equity loan is usually cheaper than a personal loan so it is often a good choice for homeowners.
- You want to sell your home
In case you want to sell your home, refinancing your second mortgage into your first might make it easier for you. If you do not care for a few thousand dollars, and selling your home is more important then this might be a good option for you.
Steps to Refinance a Second Mortgage
If you have decided to refinance your second mortgage, then consider the following steps in order to get the refinance done
Find out if refinancing the second mortgage is right for you. Lenders often charge you a refinancing cost which can be 3% or more of your mortgage money. So, when you decide to refinance your second mortgage, make sure you have the cash available to pay for the refinance. If you do not save enough money from your new interest rate to pay for this amount and other mortgage costs, then it is probably not the right time for you to refinance your mortgage.
See if you qualify. You need to be eligible to get a refinance. The lenders typically evaluate your LTV (loan-to-value) ratio, if it doesn’t match with your lender’s criteria, he may not approve your refinance request. Apart from this, lenders also see your credit score and overall financial situation before they approve your application.
Do your research. It is important that you evaluate all the aspects of refinancing properly before you make any decisions. Check the current interest rates and find a reliable mortgage lender who offers the best mortgage terms.
Get your finances in order. Your lender will evaluate your credit score and credit history before approving your application so make sure that you keep tabs on your credit score for some time before applying for a mortgage. Remember, getting a second mortgage refinance is harder than your first refinance, so you need to be extra careful with your finances.
Gather your Paperwork. There are certain documents that lenders usually require for this process. It includes W-2s, bank statements, tax documents, investment account statements, your primary and secondary mortgage documents, and other proof of income. Make sure you keep these documents ready beforehand. Also, ask your lender if he has any unique document requirements.
Apply for the refinance. Once you have your documents ready, and you have selected your lender, submit your application. Continue to make payments to your second mortgage, so that you stay current on your account.
Final Words
Refinancing is not something that you should take lightly, you need to weigh the pros and cons of it very carefully to make an informed decision. Whether you are interested in refinancing your second mortgage or are planning to get your first home loan, Affiliated Mortgage will make this experience really easy for you. We have helped our clients to get the most revenue out of their refinance. Our experts will also help you determine what is the best time for you to submit a refinance application and how you can improve your chances of getting approved.
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