You Should Still Shop Around
As with any mortgage, its important to shop around.
Its crucial to make sure youre getting not only the best rate, but fair closing costs and a reputable loan originator.
Check out Bankrates guide to finding a mortgage lender for more information about how to undertake your search.
If youre unsure where to begin, its probably best to start with your existing lender to see if they have any better offers than your current mortgage. After that, you can search for second home and investment property refinancing offers online, or consider reaching out to a mortgage broker if youre having trouble finding a good deal on your own. Portfolio lenders may also be able to write your mortgage.
Ways To Use A Second Mortgage
Second mortgages can be used for whatever purpose you need, but in general, its a good idea to save them solely for essential purchases rather than luxuries or splurges.
Your home serves as collateral, so if you cant keep up with the payments, you risk foreclosure.
That said, there are occasions when taking out a second mortgage might make sense for you:
- Debt consolidation: If you have higher interest rate debt, such as credit card balances or medical bills, using a second mortgage for debt consolidation can help you save money. Because the second mortgage is secured by your home, you might receive a lower interest rate than youd get with a personal loan, which can help you pay off your debt faster.
- Major repairs: If your home needs significant repairs, such as replacing your roof or installing solar panels, you can use a second mortgage to finance those costs.
- Home renovations: You can use a second mortgage to renovate and update your home. Whether youre adding a bathroom or replacing kitchen appliances, renovations can help improve your homes resale value.
- Medical bills: If you have medical procedures coming up, you know how expensive they can be. A second mortgage can help you pay for those procedures, and finance them over several years.
- College costs: If your children are entering college, you can use a second mortgage to cover the cost of tuition and room and board.
Second mortgages come in two forms: home equity loans and home equity lines of credit.
Second Mortgages Often Have Higher Interest Rates Than Cash
Although a second mortgage is a secured loan that typically offers a lower rate than what credit cards or personal loans offer, the primary mortgage holder still has first claim on your house.
This means the second mortgage holder’s claim on the property isn’t quite as secure as when there’s only one mortgage on the home. That’s because the primary lender would have first dibs on the proceeds from a home sale if foreclosure was necessary. So your mortgage rate on a second mortgage will likely be higher than the rate on your first mortgage — and higher than the rate on a cash-out refi.
If you take a cash-out refi loan, you won’t have this issue. You’d have one loan, and that lender would have the primary claim to any proceeds from foreclosing on your home if doing so became necessary. As a result, the rate you’re offered for a cash-out refinance loan will likely be lower than the rate for a second mortgage rate would be.
Consider these big differences between cash-out refinance loans and second mortgages if you’re interested in tapping the equity in your home. Understanding these factors can help you make the choice that’s right for you.
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Qualifying For The Refinance
This refinance is like any other mortgage application, with complete credit checks, income verification and debt evaluation. For the best rates, you’ll need a good credit score, over 620. Make sure your overall debt-to-income ratio falls below 40 percent, meaning your debt bills aren’t more than $400 per $1,000 of monthly income to qualify for loan programs.
References
Getting A Second Mortgage
A second mortgage is a second loan that you take on your home. You can borrow up to 80% of the appraised value of your home, minus the balance on your first mortgage.
The loan is secured against your home equity. While you pay off your second mortgage, you also need continue to pay off your first mortgage.
If you cant make your payments and your loan goes into default, you may lose your home. If thats the case, your home will be sold to pay off both your first and second mortgages. Your first mortgage lender would be paid first.
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When You Should Refinance
How do you know if refinancing is the right choice for you? There are many reasons you may choose to refinance, including:
- You want to change your term or rate: If you want to change the term or rate of your loan, you may want to choose a refinance. With a second mortgage, you cannot change your primary loans terms.
- You want to pay your mortgage faster: The sooner you can free yourself of a monthly mortgage payment, the more money youll be able to allocate to your other financial goals like retirement, vacations and renovations. If your mortgage is your only debt, paying it off will leave you debt-free.
- You want to eliminate private mortgage insurance : If you build up enough equity in your home you may be able to eliminate PMI.
- You want to take cash out of your equity: If you unlock the equity in your home, you can increase your cash flow and tackle those long-anticipated home renovations.
- You want to consolidate debt: If you have plenty of home equity and your aim is to consolidate debt, a cash-out refinance may be the right choice for you. When you reduce the number of bills you pay each month, you can simplify your finances.
- You want a lower monthly payment: With a lower monthly payment, you can keep more money in your pocket to save for other financial goals, such as your next family vacation or your kids college tuition.
Debttoincome Ratio Of 50% Or Less
Many mortgage lenders require a borrowers debttoincome ratio to be less than 50%. Your DTI is the amount of monthly expenses divided by your total monthly income. So if you pay $2,000 each month for household expenses and mortgage payment, and your income is $5,000 per month, then your DTI is 40%.
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What If I Have A Second Mortgage On My Home Can I Still Refinance
Typically, any second mortgages are paid off through the refinance. You can consolidate both loans into one new first mortgage and you will only have one payment each month.
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Evaluate Your Financial Situation
Part of qualifying for any mortgage loan, including a refinance on a second mortgage, is to see where your overall finances stand. This means looking at factors such as your:
- Overall income
- Debt-to-income ratio
- Total debt burden
If you owe too much or have too high of a DTI, it may be worth holding off on your refinance until you can pay down some balances.
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What Is A Second Mortgage
A second mortgage is a form of loan where the collateral is your home. You can borrow against your homes equity to get the money you need for major expenses or big purchases.
Your homes equity is the houses current value minus what you still owe on the mortgage. For example, if your home is worth $300,000, and you still owe $200,000, your homes equity is $100,000.
Second Mortgage Vs Cash
A second mortgage and a cash-out refinance are both common strategies to borrow money using your home as collateral but there are some key differences.
A cash-out refinance replaces your original mortgage with a new, bigger mortgage, allowing you to receive the difference in cash. Its also a popular method for debt consolidation and financing home improvement projects, and it doesnt require you to take out an additional loan the way a second mortgage does.
With a cash-out refinance, you can change the interest rate and terms of your mortgage and the rates are often lower than a home equity loan or HELOC. A cash-out refinance also tends to be easier to qualify for than a second mortgage, as the lender would be first in line to be paid back in the event of a default. But youd have to pay more in closing costs since its considered a new mortgage.
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How Often Can I Apply To Refinance My Mortgage
While you should only ever refinance your home with good reason, there are no rules that limit how often you can refinance. Lenders, however, will typically set a limit. Keep in mind that your credit report will be pulled each time you refinance, and when this happens too frequently it can negatively affect your credit score. Since your credit score is also a factor in a lenders decision to approve your refinancing, a lower score would also lower your chances of approval.
Second Home Mortgage Rates
Owning a second home means avoiding those creepy short-term home rental disappointments and those nothing-to-do-this-weekend blues. Its your place, only better. Its somewhere cool.
Finding the best loan offer for your second home begins with shopping mortgage rates. With the NerdWallet second-home mortgage rate tool, punch in a little data and youre combing through interest rate offers in no time.
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There Are Different Types Of Second Mortgages
What exactly is a second mortgage? These loan products come in a couple of different forms. For instance, a revolving HELOC offers the borrower continuous access to equity as they pay off what they previously owe , much like how a credit card works.
This type of loan can also be a closed second mortgage, which means that you get one lump sum of cash from your equity, and gradually pay it down, much like an auto loan.
HELOCs are typically only offered to those in urban areas who have a strong credit profile. If you are experiencing credit challenges or limited income, private mortgages are likely your only option.
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Using A Cashout Refinance To Buy Investment Property Or A Second Home Faq
Can I buy a second home with my equity?
Yes, you can use the equity in your current home to buy a second home. Many people do this by taking a cashout refinance on their house, and using the withdrawn money to make a down payment on a second mortgage or pay for it with cash. But you could also tap your equity and buy a second property using a home equity loan or line of credit .
How much cash out can I get on a refinance?
When you do a cashout refinance, you usually have to leave 20% equity in the home. That means you can only take out enough cash that your total loan amount equals 80 percent of the homes value. For example: If your home is worth $250,000, and you owe $150,000 on the existing mortgage the most cash you could get out would be $50,000.
Can I refinance my home to buy an investment property?
Its possible to use a cashout refinance on your home to buy an investment property. You could use the withdrawn money to make a down payment or buy the investment property with cash. And you can do this as soon as the refinance closes. However, you still have to meet your lenders minimum credit score requirements for refinancing. And youll likely need a fair amount of equity in your current home, as lenders usually require1525% down to purchase an investment property.
How soon after refinancing can I buy another home?How long does it take to get cash out from a refinance?Can you pull equity out of a rental property?
Get Documents In Order
Your lender will look at your credit score and DTI ratio to determine what type of terms to offer for your refinance. If you have a second mortgage through a company different from your first mortgage, youll need documentation from both.
You should also expect to provide proof of income , proof of certain assets and the like. Gathering these documents early can save you time and energy later.
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Shop Around For Other Lenders
Whether your existing lender offers a great refinance rate, it usually makes sense to rate-shop. Checking out interest rates and researching different lenders enables you to see which ones offer the best terms.
After shopping around for other offers, you can make an informed decision about your available loan options and where youll save the most money.
Types Of Second Mortgages
Second mortgages involve borrowing against the equity in your home. The two most popular ways to do that is through a home equity line of credit or home equity loan.
HELOC
A HELOC is a line of credit that allows you to borrow against the equity in your home. Like a credit card, youre able to withdraw up to a certain credit limit for a certain period of time . During that period youll be required to at least pay the interest amount each month, however, after the draw period ends, youll have to make payments toward your interest and principal. Moreover, you wont be able to borrow any more money once the draw period ends.
Home Equity Loan
A home equity loan is another way to borrow money against your home equity. Like a regular loan, youll receive a lump sum of money which youll have to pay back in installments plus interest. Rates are typically fixed and terms are usually longer than a HELOC which may make it more affordable.
Check out how to refinance a regular mortgage.
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Pros And Cons Of Home Equity Loans
There are several advantages to home equity loans that can make them attractive options for homeowners looking to reduce their monthly payments and simultaneously release a lump sum. Refinancing with a home equity loan can offer:
- Lower, fixed interest rates than your previous mortgage
- Lower monthly payments due to lower interest rates and a smaller principal
- A lump sum that can be used for any purpose, including renovations and improvements to your property that, in turn, can raise its value
On the other hand, home equity loans come with risks that you should be aware of:
- Your home secures the loan, so your home is at risk if you fall behind on your loan repayments.
- With a traditional home equity loan, you have to borrow a set amount of money. If you don’t end up needing the whole amount, you can be stuck paying interest on a portion of the loan you don’t use. This is why HELOCs are a better option for homeowners who need to cover ongoing, unpredictable expenses.
- You cant get a home equity loan with too much debt or poor credit. This bars some people from being able to access the equity in their homes.
Mortgage lending discrimination is illegal. If you think you’ve been discriminated against based on race, religion, sex, marital status, use of public assistance, national origin, disability, or age, there are steps you can take. One such step is to file a report to the Consumer Financial Protection Bureau and/or with the U.S. Department of Housing and Urban Development .
How Can You Refinance Your 2nd Mortgage With A New Mortgage
Second mortgages often have higher interest rates than their first mortgage counterparts, and may even carry variable rates that can increase with market conditions. One solution that can allow you to save on interest and lock in a lower rate on money borrowed with a second mortgage is to refinance with a new mortgage. A new mortgage can replace both your existing first mortgage and your second mortgage, saving you money and consolidating your payments.
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Gather information about both your first and second mortgage. This should include the financial institutions currently holding them, loan account numbers and the payoff balances including any interest due. If you do not have the information on hand, contact your existing mortgage company.
2
Compare banks and mortgage companies and decide to which one you wish to apply for your new mortgage. Consider factors such as available rates and terms, convenience and customer service.
3
Contact your chosen bank to begin the application process. When asked what the purpose of the loan will be, explain to the representative that you wish to refinance both your first and second mortgages into one new loan. Provide the person helping you with all information on your existing loans.
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References
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