Have you ever taken out a mortgage before? For most homeowners, as well as would-be homeowners, this loan will be a part of the process. Sometimes, there will be circumstances in the future that necessitates taking out, and refinancing, a second mortgage. Although no two situations will be alike, refinancing can occur in numerous scenarios.
From changing your loan terms, to improving your credit rating, refinancing can be a huge benefit. In order to do this properly, you’ll have to consider some tips beforehand before you proceed to refinance a 2nd mortgage. Thankfully, most of those instructions can be condensed right here.
Here are the eight important steps on how to refinance a second mortgage:
1. Figure out why you need a second mortgage
Before you refinance a second mortgage, ask yourself this initial question: Why do you need a second mortgage in the first place? Perhaps you want to improve the look and, by extension, value of your home by investing into it. This can have a huge effect on a potential resale down the line.
Or, you may want to find new avenues for paying for your own education. There are a number of areas in life that can be pretty costly. Borrowing a second mortgage can assist you, but only if you first know why exactly you need one!
2. Decide which type of second mortgage to get
For your own benefit, you should be aware of the different types of second mortgages available to you. The most common one is the home equity loan, which entails borrowing a lump sum loan from a lender. This loan is generally based on its namesake; the amount you receive is based on your home’s equity.
Another common second mortgage type is the home equity line of credit. Colloquially known as a HELOC, this loan differs from a home equity loan, due to how the funds are dispersed to you. Withdrawal periods are given to the borrower, and interest payments can be made depending on the remaining credit.
3. Qualify for a second mortgage
After you have figured out which type of second mortgage you prefer, you’ll have to get approved. The qualification process comes down to a number of factors, most of which reside within the property. Many lenders will employ the use of a loan-to-value ratio, to determine your overall risk.
Lenders only want to provide second mortgages when the amount of risk posed by the borrower is low. As such, you’ll have to get some important pieces of information ready. Once these have been acquired, you are that much closer to the refinancing stage!
4. Check your financial status
The status of your financial circumstances is the most, if not the most, important part of the refinancing process. As a result, you’ll want to get your affairs in order as soon as possible. If lenders notice that your credit score is in poor standing, you will most likely not qualify at all!
In addition, the amount of debt you currently have will be measured against your sources of income. The only way to receive the refinancing terms you desire is to mitigate your risk factors. Pay off your debts as much as you can, and gather extra sources of income if possible.
5. Research about second mortgages
You aren’t just limited to traditional lenders at a bank. Typically, there will be private lenders available, who can offer you other terms regarding refinancing. That is why it is key to do your research on lenders nearby. Each lender will offer different interest rates, for example.
Moreover, talking with a specific lender may be more beneficial than one you do not know. Familiarity is key, especially when trying to establish a working relationship between lender and borrower.
6. Keep documentation of second mortgages
Every meeting between yourself and a potential lender is critical. As such, don’t waste any time by forgetting to bring the necessary paperwork. The refinancing process requires certain pieces of documentation, such as financial statements related to your mortgages. If your lender has any specific requests, always ask them beforehand.
7. Apply for a second mortgage
Once everything has been set in stone initially, you’ll then have to apply for your refinancing. You’ll typically have to wait a few weeks for this to process. Always keep your contact information open, as lenders may require additional information down the line.
8. Keep making payments
When a successful refinancing of your second mortgage occurs, keep on making your usual payments. Your revised terms should allow you to make lower payments now, if that was discussed with your lender. Don’t miss out on payments; this will potentially harm your terms!
Refinancing a second mortgage isn’t as difficult as one would think it to be. The process of organizing your affairs is much more challenging. After you have gotten your affairs in good standing, send in your application. If everything checks out, your second mortgage will then be given a new, revised set of terms!