Can I Afford a Second Mortgage?

You will not know if you can afford a second mortgage without reviewing several financial factors and before you know what the requirements are for a borrower who wants to apply for another home loan. One factor is the value of your home. What is the current market value of the property you want to refinance? If the value is more than what you owe, you may be qualified for the second mortgage.

The second mortgage is also known as a home equity loan or a home equity line of credit (HELOC) depending on the terms of the note. For either of the notes you will need to consider whether you will be able to afford the new payment associated with the loan. Let’s take an in-depth look at both types of loans before we cover your qualifications for the note.

The home equity loan payment is a loan that allows you to withdraw the amount of equity that you have built in your home through payments on your original note. You will have a fixed rate of interest and you will have a new monthly payment that will remain the same each month. If you go to an online calculator you will be able to put in the terms specific to your loan and find out what the new payment will be.

You will need to know the amount you intend to borrow, the rate of interest and the length of time you will repay the note. Here’s an example: You will use $15,000 of your equity at a 7% rate of interest for a period of 10 years. The online calculator will show your new monthly payment to be $174.16 per month. You need to look at your monthly income and your expenses to determine if you can afford a second mortgage.

A home equity line of credit (HELOC) is another type of home financing that will be based on the amount of the equity you have in your home. You will have a monthly payment that is based on the amount that the lender determines. You may pay interest on the first few years and you may only have to pay a percent of the amount owed. There will not be a fixed rate of interest on the HELOC. This means that if the interest rate goes up, your payment will go up.

Let’s look at an example: You will take $28,000 as your line of credit with an interest rate of 5.5%. The interest payment alone on that amount will total $128.33 every month. This will not decrease the amount of the principal that you have. When the time comes that you begin payments on the principal balance of the note you will have even higher payments. You will need to take into consideration the escalating costs of the HELOC when you decide you can afford a second mortgage using this method of financing.

Now let’s look at the affordability for you of either of these financing plans. What is your monthly budget now? Do you have the discretionary income to make another monthly payment? If so, what is the amount that you have available for another payment? If you do not know how to figure let’s look at an example: Total your income from all sources. Now total all your debt.

You will need to include your primary payment on your home, your utilities, your food and clothing, and any other monies that you expend on a regular monthly basis. Total up all of these expenses. Subtract the total expenses from the total income figure and you will have the amount that is left over for the second payment on your home. The lender will ask for the same figures and will base his approval of your request on the percent of your monthly income that you have obligated to pay bills. The lender will not take a risk if your percent of payments is greater than 36% of your income. If you fall below that percentage there is a good chance that the lender will be glad to approve your application for the credit.

If you have done the math and you do not think that you will have the income or that the budget will be too hard to manage you probably should not take out the loan. If you do not make the payments you will default on the note and you can lose your home to foreclosure. Be sure that you have a fund set up with several months of your expenses saved for emergencies. If you have a substantial savings account and you pay less than 36% of your monthly income to bills then you can afford a second mortgage and the lender will probably approve your application.