So you want to take out a home equity loan. Maybe you’re looking for some extra funds for your business venture, or maybe you just want to spruce up the kitchen, put in a hot tub, or even just buy a new car. A second mortgage can be a great way to do all of these things. However, many people worry about how taking out a second mortgage will hurt their credit.
The good news is that taking out a second mortgage won’t necessarily hurt your credit, especially if you’re doing it the right way and using that extra money wisely. But some ways misusing a mortgage loan can have negative consequences on your finances and credit history. Let’s look at what these are and how you can ensure that taking out a loan against your existing home loan doesn’t hurt your financial situation in the long run!
How a second mortgage works
If you have home equity, you may be able to take out a second mortgage on your home to access it.
A second mortgage is a type of loan that lets you borrow against the value of your home. Your home is an asset, and that asset can gain value over time. Second mortgages, also known as home equity lines of credit (HELOCs), are a way to use that asset for other projects and goals – like paying off debt or making home improvements.
While there are benefits to taking out a second mortgage, they come with drawbacks. One of them is the potential impact on your credit score.
The impact of HELOCs on your credit score
If you’re looking for a home equity loan for your home equity, one thing you might be wondering about is how it will affect your credit score. The good news is that taking out a HELOC isn’t likely to have a significant impact on your score — at least not for the first few years.
If you shop around for a HELOC, it’s unlikely to affect your credit at all. Most lenders use a “soft inquiry” when you ask for an initial rate quote; this doesn’t show up on your credit report and doesn’t hurt your credit score. Your lender is just checking to see what interest rate you might qualify for based on the information in your credit report.
Once you’ve locked in an interest rate and formally applied for the loan, however, it becomes important to know how it will affect your credit. As with any other loan application, the lender will want to check your credit history before approving the loan. The application will generally result in what’s known as a “hard inquiry” being added to your credit report. Hard inquiries can knock a few points off your score and stay on your report for two years — but they have a more negligible effect.
So, can a second mortgage hurt your credit score? While it’s certainly possible, the answer is probably not. As long as you’re borrowing responsibly and can make all of your payments on time, a HELOC shouldn’t negatively affect your credit score.
If you’re concerned about how your credit score will be affected by a loan, you should also consider talking to a financial advisor or other experts. They’ll share personal advice with you and explain how to get the most out of this financial product.
