To Fill A Down Payment
If you don’t have a down payment that equals 20% of the value of the home you want to purchase, getting a second mortgage can fill this financial shortfall, while eliminating the need for private mortgage insurance. Avoiding this expense can save you thousands of dollars a year in insurance payments.
When you take out a second mortgage for this purpose, the mortgage is structured with an 80% first mortgage and a second mortgage that makes up the difference between the value of the home you are purchasing and your down payment.
Are Second Mortgage Rates Higher Than First Mortgage Rates
Second mortgage rates are likely to be higher than first mortgage rates simply because the lender with the second mortgage will be second in line to be paid should you fall into foreclosure. However, second mortgage rates still may be lower than rates on unsecured debt like personal loans or credit cards.
Private Lenders May Have Looser Qualifying Guidelines
If you and your mortgage professional decide to go the route of a private lender for your second mortgage, then you may be subject to less stringent conditions than at a traditional bank. Private lenders are exactly that, private, so they are not bogged down by regulations and internal bank policies, and are therefore much more flexible. This is great for the consumer!
That being said, most private lenders are looking at a mix of items, and so the more you can help make your case why you are a good risk, the better the pricing and overall the more you will be able to borrow in the alternative mortgage market.
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What Is A Second Mortgage Calculator
The second mortgage calculator is a nifty tool that can quickly calculate how much you can potentially qualify for and how much equity can be take out from your home. Calculating your 2nd mortgage monthly payments is an important next step in finding out what would be the cost of carrying forward the mortgage. The second mortgage calculator makes it easy for you to determine how much funds you can potentially borrow and I am always available to answer any questions you may have.
Is A Second Home Mortgage Right For You
A loan to purchase a home is usually the first mortgage lien recorded on a property subsequent loans depend on the amount of owners equity in the home and generally require a new appraisal. Homeowners may use the money from these second mortgages available as a lump sum home equity loan or as a home equity line of credit for any purpose. Deciding which loan is right for you depends on the loan’s purpose and your personal spending habits.
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But There Are Downsides
The major disadvantage of taking out a second mortgage is that your house is on the line. If you lose your job or encounter some other type of financial difficulty and can’t make your payments, you could lose your house. You are also are reducing the amount of equity in your home, which many consumers count on to help them in retirement.
Is A Second Mortgage Right For You
There are many different factors that might contribute to your interest in getting a second mortgage, and its important that you carefully consider each before you make your final decision.
The first thing you should think about is your ability to pay. You will have to consistently pay both your second mortgage and your primary mortgageand these payments can quickly become overwhelming.
You should also think about whether there is a better way for you to fund the project or need that you have. If you want to finance a home renovation, for example, consider holding off until you can save up enough to cover the costs. Even though you may have to delay your planned renovation, you wont have to take on the burden of a second mortgage and risk losing your home if you were to default on payments.
This is why speaking with a mortgage professional is important when considering whether or not a second mortgage is right for you.
Many people find themselves in a major financial hole after getting a second mortgage to pay off debt because they didnt address the issues that caused them to wind up in debt in the first place. Before you apply for a second mortgage loan, take some time to reduce your debt and implement responsible spending habits and budgeting.
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Why Would You Need A Second Mortgage
- You want to consolidate debt. A second mortgage can be used to pay off your high-interest debt so you can focus on paying back a single loan at a potentially lower interest rate.
- You need to borrow for a major purchase. Say you need to fund a renovation or pay for your childs education. With a second mortgage, you can use the equity youve built in your home to pay for big-ticket items you may not otherwise have the cash for.
- You want to buy a second property. This could be a cottage, a vacation home or an investment property. Whatever it is, a second mortgage can help you purchase it.
Can I Get A Second Mortgage With Bad Credit
Yes, but lenders will likely reduce how much you can borrow depending on how low your scores are. Home equity lenders generally require a credit score of at least 620, although some may set a minimum as high as 680. If you have a lot of equity but a lower credit score, consider an FHA cash-out refinance. Cash-out refinances backed by the Federal Housing Administration allow you to borrow up to 80% of your homes value with a score as low as 500.
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How Much Can I Borrow
That depends on how much equity you have built up in your property. Generally speaking, you will only be able to take out a portion of the of equity youve built up. Lenders have restrictions on the loan-to-value ratio and take second mortgages into consideration.
For instance, most second mortgages allow you to access up to 80% of the equity you have accumulated in your property . If you own a property valued at $500,000, and your first mortgage is for $325,000, youd possibly be able to get access up to $75,000 upon obtaining a second mortgage if youve been approved to borrow 80% of the market value of your home. If however, you owed $400,000 on your first mortgage, you wouldnt be able to access any new funds with a second mortgage approved to 80% LTV, as youre already at 80% LTV
On the other hand, a closed second mortgage may provide you with access to a greater amount of your equity. Specific questions like this should be addressed with a mortgage broker who specializes in second mortgages.
Summary Of Second Mortgages
A second mortgage can be a useful financing vehicle to pay off debts, pay college tuition, or finance an addition to your house. When considering a second mortgage, be sure to consider its merits versus a home equity line of credit. Also, compare rates and fees at several banks, credit unions, and financing companies to get the best deal.
Before applying, get a copy of your credit report and credit score and fix any errors that may appear on your report. Lastly, remember that when you take out a second mortgage, you are tapping the equity in your home, so borrow only for necessary expenses.
This content was created in partnership with the Financial Fitness Group, a leading e-learning provider of FINRA compliant financial wellness solutions that help improve financial literacy.
Read more information and tips in our Mortgage section
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How Does It Work
Your most valuable asset is the equity you have in your property. Like cash, you can utilize them to pay for your expenses. Based on your financial goals and situation, a second mortgage can help with that. The most basic requirement for a second mortgage is the borrower must have sufficient equity built up in their home. It also depends on the value of your property, the mortgage should not be more than 20% of the propertys value, and to be approved, the borrower must have a minimum credit score of 620. You must not forget the Debt-to-Income ratio as well it must not be lower than 43%.
Advantages Of A Second Mortgage:
- You dont have to discharge your current low rate first mortgage and suffer penalties and fees.
- Since there are many providers, both institutional and private , it is easier to arrange, especially when you compare a second mortgage vs a HELOC.
- Most second mortgages are interest-only payments and one-year terms.
- Up to 80% of your appraised home value can be used to arrange a second mortgage, minus the amount left to pay on the primary mortgage.
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Is It Difficult To Qualify For A Second Mortgage
Most Australian lenders are reluctant to approve an application for a second mortgage. This is mainly because second mortgages are seen as a high-risk borrowing option due to the lower priority placed on the second mortgage.
With this in mind, the majority of lenders will either place tight limits on the amount you can borrow or simply refuse to offer you a second mortgage altogether. But there are lenders who can help you if you need a second mortgage, so contact a trusted mortgage broker for assistance.
If you want to take out a second mortgage, you’ll need to get approval from the lender that financed your first mortgage. You’ll typically need to pay a fee of a few hundred dollars to get the first lender to assess your request.
If youre taking out a second mortgage with the same lender that offered your first mortgage, you may be able to borrow up to 95% LVR . Meanwhile, borrowers taking out a second mortgage with a different lender may be able to access a loan with up to 85% LVR allowed.
If youre self-employed and looking for a low doc loan, you wont be able to get approval for a second mortgage unless you go through a private lender, which is not recommended.
Common Uses Of Second Mortgages
Consider how you plan to use the funds from your loan. Its best to put that money toward something that will improve your net worth in the future. That is because youll need to repay these loans, theyre risky, and they cost a lot of money. Here are a few common ways to use a second mortgage.
- Home improvements: Renovations are a common use for second mortgage funds because the assumption is that youll repay the loan when you sell your home with a higher sales price.
- Avoiding private mortgage insurance : It might be possible to avoid PMI with a combination of loans. For example, an 80/10/10 strategy or piggyback loan uses a second mortgage to keep your primary mortgage’s loan-to-value ratio at or below 80%. Just make sure it makes sense, compared to payingand then cancelingPMI.
- Debt consolidation: You can often get a lower rate with a second mortgage, but you might be switching from unsecured loans to a loan that could cost you your house.
- Education: You may be able to set yourself up for a higher income. But as with other situations, youre creating a situation where you could face foreclosure. Standard student loans might be a better option.
Beware of risky loan features like balloon payments and prepayment penalties.
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Second Mortgage Rates And Fees
Depending on the lender, and the above factors , the second mortgage interest rates will vary. In most cases, an applicant will have higher second mortgage rates than their first mortgage because the first mortgage has priority on the collateral if the borrower defaults on the loan.
The interest rate on a second mortgage in Canada can be either fixed or variable. Although the interest rate on a second mortgage will be higher than on the first mortgage, the interest rate may be lower than other types of loans, including credit cards and unsecured lines of credit.
The fees for a second mortgage in Canada can also be quite hefty. An applicant may have to pay for appraisal fees, title search fees, title insurance fees and legal fees associated with a second mortgage loan.
Make sure you do your research when you are looking for the best second mortgage and shop around so that you can ensure you are getting the best deal. Be sure to include the following in your search:
- A local bank or credit union
- A mortgage broker
- An online lender
Here is an example of what the second mortgage rates may be for a HELOC, which is only available with a major bank or credit union and means that you will need to have good verified income, a high credit score and high minimum equity. We have also included the second mortgage rates available with a private lender.
| Type of provider |
|---|
| 10% |
The Value Of The Tax Deduction
So the tax deduction that second mortgage interest potentially brings is one major advantage of second mortgages over other financing alternatives. With a fixed-rate second mortgage, you have the certainty of knowing exactly what your payments will be over the life of the loan, whether it be 10 or 15 years.
That’s in contrast to an adjustable-rate second mortgage or a home equity line of credit where the interest rate adjusts, depriving you of that certainty.
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What To Look For In A Second Mortgage
Not all second mortgages are created equally. Because you are seeking to take out another mortgage, you will be subject to a similar set of fees that you encountered in your first mortgage.
Obviously, the lower the fees, the better, so you should comparison shop carefully among a number of lenders and obtain your second mortgage from the lender who offers the best terms.
Interest Rates And Fees If You Borrow On Amounts You Prepaid
You pay either a blended interest rate or the same interest rate as your mortgage on the amount you borrow. A blended interest rate combines your current interest and the rate currently available for a new term.
Fees vary between lenders. Make sure to ask your lender what fees you have to pay.
You may not have to make any changes to your mortgage term.
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Second Mortgage Terms And Conditions
The biggest risk associated with applying for a second mortgage is the possibility of foreclosure. Second mortgage terms dictate that you will not only have to pay the payments of your first mortgage, but will also have to keep on-top of the payments for your second mortgage as well. And because second mortgage rates in Canada are higher than those for first mortgages, your overall monthly payments will increase. If you run into trouble paying back the first or second mortgage, your home is at risk of being foreclosed.
Some Common Closing Costs
Typical closing costs include origination fees, lender processing and underwriting fees, credit report, title insurance, reconveyance fee, recording fee, title closing fee and title document preparation fee.
Lenders are required to provide you with an itemized list that estimates your closing cost prior to closing, although your actual closing costs may differ at closing. Sometimes loans also come with repayment penalties, hefty fees for late payments, or balloon payments at the end of the loan.
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Can Be Used To Avoid Pmi
When you apply for a conventional mortgage, if you do not have 20% to use as a down payment you will be required to obtain private mortgage insurance . In Canada, this is what we typically refer to as your Canadian Mortgage and Housing Corporation fees. And they can be quite high!
On a $500,000 mortgage loan with 5% down, you will be paying 4% CMHC fees. Thats a total of $19,000!
Taking out a second mortgage along with the first mortgage is one way borrowers can avoid PMI. A second mortgage can add a monthly payment to your budget, but can be a cheaper option than PMI.
Key Aspects Of Second Mortgages
A second mortgage is subordinate to the first mortgage, which means that in the event of default, the first mortgage will get priority in terms of repayment. Only after the first mortgage has been completely repaid from the sale proceeds will the 2nd mortgage lender will be able to recover the loan.
A mortgage is always taken out against the equity in your home, and second mortgages are no exception. The loan amount that the second mortgage lender will offer you will depend on the equity built up in your home.
Interest rates on a second mortgage are higher than those charged on the first one. This is because the second mortgage lender is taking a higher risk, as he gets second priority in case of default. That said, working with a mortgage professional can help you reduce these rates and obtain the right product for your financial situation.
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When To Consider A Home Equity Line Of Credit
If you need extra money intermittently, a variable-rate home equity line of credit might be your best choice. Once the lender approves you for a maximum line amount, you can access the available funds as you need them. Use your Home Equity Line of Credit Visa Access Card anywhere Visa is accepted, write a check, visit a branch or ATM, or log in to Online or Mobile Banking and transfer money to your U.S. Bank savings or checking account. You may have ongoing access to funds for 10 years, called the draw period, following the date you open your line of credit. After the draw period you’ll have a repayment period of 20 years.
Monthly minimum payments are variable and based on the amount of the line balance and the variable interest rate. As you pay the money back, the funds are available again on your HELOC. This provides you with a renewable source of funding during the 10-year draw period. This is a good option if you anticipate the need to make periodic payments for tuition or remodeling.
Although a home equity line of credit provides ongoing access to available funds, which may be tempting for some people, there are some critical things to consider.
- You have to pledge your home as collateral
- If you dont make payments, your property can go through foreclosure
- Your credit score is on the line if you arent diligent with your payments
