If you reside in the U.S., you will know that the cost of a home is expensive. But recently, prices have reduced, making it easy for homeowners to still have equity in their homes. Taking out a second mortgage is one easy way for homeowners to connect to their equity for cool cash. There are so many things you might need money for, and even after taking out the first mortgage, it still might not be enough.
Taking a second mortgage might be the only option, but it will increase your overall debt, which can lead to foreclosure. If you are unable to pay off your second loan you leave the lender no choice but to foreclose your home. The second mortgage is termed “second” or “junior lien” because it is the second in line to be paid off after your original home loan.
What is a Second Mortgage?
A second mortgage is a loan you borrow against the equity you have built up in your home. It is an inferior home loan made while there is still an original mortgage. Since the second loan will only be repaid when the first has been paid off, the interest rate for the second home loan will increase. While the amount that was borrowed for the second loan will be lower than that of the first.
How Does It Work?
It is straightforward. But first, make sure you have sufficient home equity. Since taking out a second home loan means you will have an additional loan secured by your home, it is possible that the first loan will not have been paid. To calculate your home equity, you have to subtract the current mortgage balance from your home’s value. The balance will be the actual value of your home.
Advantages of second mortgages
Taking out a second home loan has some advantages, and they include:
- It gives you a large amount of money that you can spend any way you want.
- It has a low-interest rate.
- The interest paid on these loans may be tax-deductible.
- You can buy a home for less than 20% and avoid paying mortgage insurance.
Note that the interest rate on your second mortgage might not be as low as the rate you got on your original mortgage. But one of the major disadvantages of a second mortgage is that your home secures it. This means that you can lose your home if you are unable to pay back the loan.
Types of Second Mortgages
There are two different types of second mortgages, and they are listed below.
Home Equity Loans (HEL)
For home equity loans, the lender will give you a huge amount of money at a time. But you will repay it regularly over some time. Note that the interest rates for home equity loans are fixed.
Home Equity Line of Credit (HELOC)
Next is the home equity line of credit. This is similar to a credit card, so you can spend the money as it comes, and you can also repay it over time. For HELOC, interest rates are adjustable.
When Should I Get a Second Mortgage?
There are situations you might find yourself in that require you to take out a second home loan. Second mortgages are not for everyone, but if you need to take out one, then you should be in any of these situations.
Unable to Get a cash-out refinance
If you are unable to get a cash-out refinance, then you can opt for this loan. Cash-out refinances, compared to home equity loans, have lower interest rates. So if you were rejected by your lender for a cash-out refinance, then you can consider getting a second home loan.
You need to Cover Revolving Expenses
Another situation that permits you to take a second mortgage is if you need to cover a home repair bill or tuition over some time. However, a home equity line of credit can give you access to revolving credit as long as you can keep up with your payments.
You need to pay off your Credit Card Debt
You can get a second mortgage if you need to pay off credit card debt. Credit cards have a higher interest rate, while second mortgages have a lower interest rate. So if you have multiple credit card balances across multiple accounts, then you need to take out a second mortgage to help consolidate your debt.
How Do I Qualify For a Second Home Loan?
It is easy to qualify for a second mortgage. These are the things you need to qualify for a second mortgage.
- You need to have a debt-to-income ratio below 43%.
- Proof of employment and income
- Credit score of 620 or higher
- At least 20% equity in your home
All of these will determine your total loan approval and your interest rate as well.
How To Get a Second Mortgage
Getting this mortgage is easy, and it is similar to getting a primary mortgage. Below are the steps and guidelines to follow to apply for this mortgage:
- The first step is to calculate your approximate home equity.
- Decide on how much you want to borrow.
- Gather documentation of your current income and debts.
- Compare second mortgage lenders
- After that, review the disclosure documents.
- Confirm if the terms are what you expected, and also confirm if you can afford the second mortgage payment.
- Provide any additional documentation required for underwriting.
Lastly, close on the second mortgage. With these steps, you can get a second mortgage without much hassle.
Where Can I Get a Second Home Loan?
Simple! You can get a second mortgage with any other lender, not necessarily the one that gave you your original mortgage. What you need to do before deciding on the lender to choose is to get a variety of quotes, interest rates, and total fees, and then compare them.
How Much Money can I get From a Second Mortgage?
The amount of money you can get depends on the amount of equity you have in your home. It also depends on your credit score and the loan-to-value ratio. Some lenders will not lend you anything below 75 to 85 percent of the loan-to-value ratio of your first and second mortgages altogether.
Can I Use a Second Mortgage To pay off my First Mortgage?
Yes, you can use a second home loan to pay off your first loan. But it is not advisable, as second mortgages come with high loan fees.
How Long Does it take to get a Second Mortgage?
The loan application and funding procedure can take up to a few weeks to a few months. But it can still be determined by your present financial situation and the lender’s criteria as well.
How Does a Second Mortgage Affect My Credit Score?
Your overall debt load might increase with a second loan. If you are unable to make your monthly payments, your credit score is most likely to be reduced.