Using a second mortgage loan for renovations

If you plan to buy a home and renovate, a second mortgage can be the answer.

A second mortgage is one of several available options that can help you finance the cost of a home renovation.

If you have built up a considerable amount of equity in your home, you may want to consider refinancing your mortgage to draw cash out to pay for renovations. Another option, however, is to apply for what is known as a second mortgage. This is a second lien on the property and, as with a first mortgage, it can be either a fixed rate or adjustable rate loan.

Home equity loan
A home equity loan is a type of second mortgage that is typically repaid over a shorter time period than a conventional mortgage. If you have sufficient equity in your home from your down payment at closing, plus any appreciation of your home’s value since the time of the sale, you may qualify for this type of financing. If you haven’t much equity, however, it may be wise to wait until you have built up more principal to draw against before requesting a home equity loan. You might want to consider doing only the renovations that you can afford to pay cash for now and waiting a little while for your equity to appreciate before undertaking larger, more expensive projects.

Home equity line of credit
A home equity line of credit (HELOC) is another type of second mortgage that is excellent for covering the cost of home renovations. It’s like a credit card attached to your house that allows you to draw funds, up to a predetermined limit, whenever you need money. But, because it’s secured against the value of your home, it provides you with a more favorable rate of interest than a credit card. And, because you can draw funds as you need them rather than receiving them as a lump sum, it works particularly well for home renovations that only require financing in small increments.

Discuss with your lender which second mortgage loan is likely to work best for the kind of renovations you plan on doing. And take care to calculate the overall cost of carrying two home loans to be sure you can comfortably afford the combined monthly payments.