A smart financing option is to use your home equity for other purposes. You can do so by obtaining a second mortgage. These loans are good for any additional expenditure you may incur, such as a home improvement plan, pending bills or debt consolidation or any other financial investment.
A home equity loan is a fixed rate mortgage that is offered against your home equity. In essence your home equity works as collateral here. One advantage of this loan is that as it is a fixed rate mortgage you do not have any surprise payments springing up on you. The payment is fixed through the life of the loan so you can easily plan your budget. Equity loans occasionally also have variable rates.
To qualify for a second mortgage you need to meet three criteria:
1. Credit rating: You need a good credit history and a good credit rating to be eligible for a second mortgage. If you have a bad credit you may have difficulty in obtaining a home equity loan.
2. Debt-to income ratio: this is a very important criterion when obtaining a secondary mortgage. Lenders typically expect this ratio to be low when issuing an equity loan.
3. LTV or loan to value ratio: Lenders typically like to keep the loan to value ratio below 80% of the house value, so they check the balance of the primary mortgage when issuing a second mortgage.
An important point to bear in mind is that home equity loans typically have a higher interest rate than primary mortgages because of the high risk involved for the lender. These however are still cheaper than credit card loans and have a lot less hassle involved than a credit card. The repayment term can be anywhere from 10 to 30 years. So you have a longer repayment time. Instalments are fixed and if you default or are faced with a financial crunch, the lender will help you out with a payment plan. This loan thus works more to your advantage than a credit card loan.
You can use this loan as an investment that is if you intend to purchase another house than you could make the initial down payment with this loan. When you seek a home loan the lender typically finances 80% of the home value and you are expected to pay the 20%, this is known as the LTV ratio and you can use your existing home equity to pay for the new home. This could be an investment but you should be sure that you are capable of paying 3 loans at the same time.
If you want to know how much you can borrow with the second mortgage, then make sure that the combined ratio of your primary and secondary mortgage should not exceed 80% of the home value.
Your home equity at any time is calculated by the current appraised value of your home minus the amount you owe on the mortgage. Typically the lenders keep the LTV below or equal to 80% otherwise you have to obtain a PMI or private mortgage insurance.
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