Home ownership entails a lot of responsibility, but also provides many benefits. One of these benefits is the ability to borrow against the value of your property through a second mortgage loan. Once you officially own the home, you have the right to take out a second mortgage loan against it. There's not a definite time frame that you must wait to pass. However, you'll need to be approved for the loan based on the lender's criteria. These include the equity value of your home and your creditworthiness as a borrower.
Understanding Second Mortgages
Home equity loans and home equity lines of credit (HELOC) are collectively known as second mortgages. These loans can be taken out on top of your existing first mortgage loan, putting them in a subordinate or secondary position. If you were to default on your home loan payments, the first mortgage's lender would initiate foreclosure and attempt to sell the home at an auction. The profits from the sale are paid out to the primary lender first, then the second mortgage lender. Because of this, second mortgage loans typically carry higher interest rates than your first mortgage loan.
Determining Equity Value
Rather than borrowing the bank's money, an equity loan borrows against the equity value of your home. If you have little or no equity value, you probably won't be able to obtain any type of second mortgage loan. Equity naturally builds over time as you pay down the balance on your mortgage loan. Additionally, property values tend to increase over time. For example, if your home was originally valued at $200,000 and you took out a loan for $180,000 you start out with $20,000 in equity. After five years, you've been able to pay off $10,000 of the mortgage and the value has increased to $215,000, that means you now have $45,000 in equity.
Second Mortgage Application Process
The loan application process for an equity loan is similar to the process you went through to obtain your original mortgage loan. The lender will determine your approval based mainly on your credit history, income and debt-to-income ratio. Your income must be enough to support the estimated payments for the new loan, in addition to the first mortgage and other expenses you're responsible for each month.
Getting an Appraisal
Second mortgage loans also require an appraisal of your home. This appraisal is important because the lender needs to verify the value of the property to determine how much equity you have. There's a chance that the appraiser might determine the value to be lower than you were expecting. If the appraised value is too low, the lender can deny your loan application for the requested amount. You have the right to request a second appraisal, although you'll have to pay for it.
