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When is the Time Right for a Second Mortgage?

A frequent question we get all the time from homeowners is “When is the best time to take out a second mortgage?”  Obviously we respond to that question by asking more questions like, What do you need the money for?  Cash out?  Debt Consolidation?  Home improvements?  What is your house worth?  What is the balance on your existing mortgage loan?  How is your credit?  How long do you plan to live in your home?  Depending on how the loan applicant answers those questions will dictate how we advise them. 

For example, If you have bad credit and no equity, the likelihood of qualifying for a home equity loan or equity line of credit is very minimal.  In most cases if you need a bad credit second mortgage, you will need to have at least 25% equity in your home.  Two years ago, you could have had a poor credit with a 580 fico score and still been able to qualify for a 2nd mortgage with only 5 or 10% equity in your home.  In today’s market, we typically will suggest pursuing a FHA loan if you need to raise capital because the 203B FHA mortgage program enables cash out refinancing to 95% loan to value.  Credit scores are not an issue with most FHA loans as long as you have compensating factors and have the ability to document your income and show the underwriter that you have the ability to make your mortgage payment after the loan.

There are times when taking money out of your home equity collateral with a 2nd mortgage may not be advised.  For instance, if you were considering relocated in the near future, and if taking out an equity loan would strip all your equity, then you might be forced in a position that doesn’t enable you to sell your home and move as quick as your new job would require. 

The most common purpose for second mortgages continues to be debt consolidation.  Using a home equity loan for consolidating credit card debt could potentially save you thousands of dollars a year, while increasing your cash flow significantly.  In most cases, second mortgage loans are tax deductible, so it makes sense to consolidate revolving debt with a fixed rate mortgage that enables you to get money back for deducting the interest at the end of the year.

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