Fixing Your House with a Second Mortgage: A Good Idea?

As you pay off your house, you build up equity. Your equity is measured by how much money you would get to keep if you were to sell off your house and pay off your mortgage loan. You want to build up as much of that as possible.

But what if you need to fix a huge problem in your house? What if you need to renovate or remodel? Can you use your equity to fund the cost of those projects? According to Bankrate, if you still owe most of your mortgage, you would probably be better off going after different types of financing.

Luckily, there are all sorts of different types of mortgage loans out there for you to use. So how do you figure out which of those loans is right for you—both to give you what you need now and to keep you from going under later?

There are three factors that banks look at when determining what sort of mortgage loan you might be able to get (or if you would be better off applying for a different type of financing):

  1. The original size of your current mortgage loan
  2. The amount of money you still owe on that mortgage loan
  3. The actual value of your house.

If you still owe most of your mortgage, even if your home is worth more than you paid for it, you’re probably not going to want to tap into your home equity to help finance a new or second mortgage. If you’ve paid your mortgage down by a fair amount and your house appraises for a good value, you have a few options that are available to you.

The No Cost Refinance Loan: Basically the no-cost refinance loan allows you to refinance your current mortgage at a better rate without having to pay for fees to do so. It’s basically taking out a new loan at a small rate that will pay off your old loan at its high rate. Some homeowners and banks use this route to cover the cost of repairs. They simply tack on the amount of the renovation on to the value of the home so that; once the old loan is paid off they have a financial cushion to help them pay for repairs and projects. These loans, though, come with lots of fine print. So make sure that you know what you’re getting into.

FHA Loan: You might not feel very trustful of Fannie Mae right now and that’s completely understandable. Still, a FHA loan is a loan that many home owners have used to help fund the cost of repairs, remodels and renovations. These are also called “second mortgages.” Some people use these loans to fund other types of projects as well—starting up new businesses, etc. To get one of these loans you have to prove to the bank how much you have spent on the house. You’ll need to submit a construction plan and have the property assessed before each step of your plan is carried out.

If neither of these options feels like a good choice for you, there are other ways to pay for major projects. You do not have to take out a mortgage. Talk to a representative at your bank to find out whether or not you qualify for any other sorts of loans.


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5 thoughts on “Fixing Your House with a Second Mortgage: A Good Idea?

  • what are your thoughts on using a 2nd mortgage to buy a second home if your main property is paid in full? I have an older coworker who paid off her home in the area and as she was near retirement, she wanted a place in the country. She ended up taking out a second mortgage on her paid off property to buy the country place in cash. I thought it was unique but I’m curious if it’s common?

    • I see absolutely no problem with that. She will have the mortgage on her primary residence which will typically incur a lower rate than a mortgage on a second or vacation home. Smart move, I think.

  • Debt is debt. Avoid at all costs. Ideally, you can determine what improvements MUST be made and set up an auto deposit into a savings account to eventually pay cash. If the fix can’t wait though, a HELOC is a good route to take, as long as there is no pre-payment penalty.

  • I think it is Susan Orman that preaches never to get a second mortgage for anything on the house that you live in. I agree with her. I have seen this be the reason for several foreclosures on homes in Hawaii.

  • Applying for a second mortgage can be a good idea if the value the renos bring is higher than the cost of the mortgage. But on the other hand, two mortgage payments and tons of debt can lead to bad things.

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