Tips For Getting A Second Mortgage
Shop around, and get quotes from at least three different sources. Be sure to include the following in your search:
Get prepared for the process by getting your documents ready. That will make the process much easier and less stressful.
Common Uses Of Second Mortgages
Second mortgages are frequently used to consolidate debt or refinance a mortgage. Sometimes, a borrower needs to refinance due to financial hardship or additional debts. Other times, a second mortgage can be a way to access lower interest rates after a market downturn or an improvement in your personal credit rating.
What happens to your mortgage if you find yourself unexpectedly laid off, or you get into a car accident that leaves you facing costly vehicle repairs? In many cases, borrowers simply dont have the savings or financial leverage to continue making mortgage payments on schedule while covering emergency expenses.
While these types of situations can sometimes be remedied by working out a deferral or payment adjustment with your lender, a second mortgage might be considered as a last resort to effectively reset the mortgage.
Second mortgages can also be used to consolidate debt from multiple sources for example, if you have a credit card or student loan debt along with your existing mortgage, you might use the lump sum from a second mortgage to pay off all those debts at once, thus consolidating your debt into a single source, and therefore a single monthly payment.
Second mortgages may also be used as a source of cash for major one-time expenses such as renovations or costs related to starting a business.
Uses For A Second Home
Some buyers already have a clear vision for their second home before making their purchase, but its OK if youre not sure. Consider your options it may even change your location. Its important to note that with Rocket Mortgage®, the property may qualify as a second home if its rented out for no more than 180 days in a calendar year. You must also reside in the home for either 14 days or 10% of the days the property is rented, whichever is greater.
You can use your second home for any combination of the above. You could vacation there for a designated period of time and rent it out via Airbnb and short-term leases for the rest of the year.
Get approved to see what you can afford.
Rocket Mortgage® lets you do it all online.
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Second Home Financing Options
For many home purchasers, an FHA-insured loan is a prime choice because these loans require a down payment of just 3.5%, and lenders offer the loans even for borrowers with lower credit scores, down to 580 or even lower in some cases. However, second home buyers are not allowed to use FHA loans for their purchase these loans are limited only to homes that are the borrowers’ principal residence.
Speak To A Broker Experienced In Second Mortgages
Getting the right product for your second mortgage ensures that the mortgage is affordable to you as well as for the amount you need. Yet, finding that product is a tough call on your own given the wealth of options available. Its also crucial only to apply for a mortgage for which you are eligible. If you dont, your application will almost certainly be rejected which can impact your credit rating.
A broker can help ensure that that does not happen. Theyll improve your chances of only ever applying successfully for a second mortgage, as well as ensuring that the mortgage is appropriate for you.
Our free, no-obligation broker matching service can put you in touch with a specialist second mortgage expert. Call us on 0808 189 2301 or enquire with us so we can connect you.
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Can I Take Out A Second Mortgage
If you get approved by a bank or private lender then you can absolutely take out a second mortgage, the more important question to ask yourself is, should I take out a second mortgage? Second mortgages are extremely tempting as they allow you access to a large amount of money that you wouldnt have been able to get otherwise. Because mortgages are often seen as good or purposeful debt, sometimes people decide that a second mortgage is a great idea without really giving it any thought. In reality second mortgages come with risks and costs just like any type of debt:
- The APR. Second mortgages carry slightly more risk for the lender than a first mortgage this means that your interest rate will probably be higher. Shop around and compare rates before you make your final decision, taking on a second mortgage with an extremely high interest rate could lead to financial issues that you dont want.
- Default penalties. All loans come with penalties for late or missed payments people often dont consider this when applying for first or second mortgages. If you can, look around for a second mortgage that doesnt have default penalties, or at least reasonable ones.
- General closing costs. Once youve chosen which lender you want to work with you should ask for a list of all other fees and closing costs, being prepared will help you budget better and youll be less shocked when the bills start to roll in.
What Is The Downside To A Second Mortgage
Of course, there are some disadvantages to obtaining a second mortgage too. Since a second mortgage is a new loan, you will be adding another payment to your monthly expenses.
This could mean you need to dip into your savings. On the other hand, it could also lead to more debt, a poor credit score, or foreclosure if you dont handle it responsibly.
Although second mortgages can offer lower interest rates compared to other forms of credit, there are still fees involved with the lending process. These include:
- Loan origination
Fortunately, most of these costs can be built into the financing, meaning there are few up front costs, if any.
Plus, taking on more mortgage debt means you have less equity in your home. Many find it difficult to even qualify for a second mortgage for several reasons such as:
- Being a new homeowner
Fortunately, there are many lenders willing to overlook these issues, you just have to know where to apply.
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Major Factors That Influence Mortgage Eligibility
When qualifying for a mortgage, lenders rely on standard indicators that determine whether a borrower can repay a loan. These financial factors also influence how much they are willing to lend borrowers. Lenders will thoroughly evaluate your income and assets, credit score, and debt-to-income ratio.
What To Consider Before Taking Out A Second Mortgage
Before taking out a second mortgage, make sure you consider the following:
Is a second mortgage the best way to access the money? Have you compared costs with other options, including remortgaging, loans, credit cards and savings?
Have you considered speaking to an independent financial adviser to find out what the best option is for your circumstances?
Can you easily afford the repayments? What will happen if interest rates rise?
Have you shopped around to get the best possible second mortgage rates?
Have you read all the terms and conditions carefully, including fees and early repayment charges?
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How Much Can I Borrow With A Second Mortgage
According to the Canadian government, you can borrow up to 80% of the value of your home, after subtracting the balance on your first mortgage. In other words, with a second mortgage, you can borrow up to 80% of the equity in your home. The average credit limit for a HELOC in Canada is about $150,000. Other private lenders may allow you to borrow more than 80% of the equity of your home, but at a higher interest rate than a HELOC.
How To Get A Second Mortgage On Your Home
This article was co-authored by Michael R. Lewis. Michael R. Lewis is a retired corporate executive, entrepreneur, and investment advisor in Texas. He has over 40 years of experience in business and finance, including as a Vice President for Blue Cross Blue Shield of Texas. He has a BBA in Industrial Management from the University of Texas at Austin.There are 9 references cited in this article, which can be found at the bottom of the page.wikiHow marks an article as reader-approved once it receives enough positive feedback. In this case, 84% of readers who voted found the article helpful, earning it our reader-approved status. This article has been viewed 113,062 times.
Second mortgages are a popular way for homeowners to get approved for a loan. If you are sure you will be able to pay back the loan, it can be a fairly secure financial decision. However, you should do some homework and serious number crunching before signing on the dotted line. Knowing your equity and credit history will help you find the lowest interest rates and fees. You can also calculate how much money you can expect to borrow based on your equity and the appraised value of your house.
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What Is A Second Mortgage And How Do I Qualify For One
A second mortgage is essentially a home equity loan that allows you to borrow money from the equity in your home without having to refinance your current mortgage. Equity is defined as the difference between the appraised value of your home and the amount owed on the first mortgage. The amount that is available as a loan is based on the equity in the home.
The benefits to taking out a second mortgage are:
- Being able to consolidate debt that has high interest into a monthly payment that has a low interest rate.
- A second mortgage can be used to pay for home improvements and other major purchases.
- A second mortgage can also be put towards paying college or university tuition for your child.
To qualify for a second mortgage, you must have over 20% equity in your home and you must be able to pay the monthly payments on your second mortgage without exceeding your Total Debt Service Ratio . If you have a low credit score, you may still be able to acquire a second mortgage, though it will be at a higher interest rate than those with a better credit score. Besides your credit score, lenders will also look at the length of time you have been working with one employer, which will provide them with a sense of security, making it easier for you to qualify for the second mortgage.
Tips For Taking Out A Second Mortgage
If you think a second mortgage is a good option for your situation, here are some tips to get you prepared for the next steps.
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Where Do You Want To Live
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How much mortgage can I afford?
The first step in searching for your home is understanding how large of a mortgage you can afford. With a few inputs, you can determine how much mortgage you may be comfortable with and the potential price range of your future home. Knowing your total household income, how much youâve saved for a down payment, and your monthly expenses , plus new expenses youâd take on , you can get a reasonable estimate. Learn more about factors that can affect your mortgage affordability.
How to estimate affordability
To estimate mortgage affordability, lenders will use two standard debt service ratios: Gross Debt Service and Total Debt Service . According to the Canadian Mortgage and Housing CorporationÂ¹Note 1:
GDS is the percentage of your monthly household income that covers your housing costs . It should be at or under 35% of your pre-tax household income.
TDS is the percentage of your monthly household income that covers your housing costs and any other debts . It should be at or under 42% of your pre-tax income.
How your down payment affects affordability
The amount you have saved for a down payment is also another important piece of information to help determine affordability. Depending on the purchase price of a home, there are minimum amounts required for your down paymentÂ²Note 2:
Step 2 of 6
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Pros Of A Second Mortgage
- Second mortgages can mean high loan amounts. Some lenders allow you to take up to 90% of your homes equity in a second mortgage. This means that you can borrow more money with a second mortgage than with other types of loans, especially if youve been making payments on your loan for a long time.
- Second mortgages have lower interest rates than credit cards. Second mortgages are considered secured debt, which means that they have collateral behind them . Lenders offer lower rates on second mortgages than credit cards because theres less of a risk that the lender will lose money.
- There are no limits on fund usage. There are no laws or rules that dictate how you can use the money you take from your second mortgage. From planning a wedding to paying off college debt, the skys the limit.
How Much Can You Borrow For A 2nd Mortgage
Lenders use the total value of your property to determine how much you can borrow for your second mortgage.
First, they multiply the property value by the maximum borrowing amount, then minus the mortgage left.
Here is an example. Your homes value is $500,000, and your maximum borrowing amount is 85%. You have $200,000 left to pay on your mortgage.
500,000 x .85 = 425,000 200,000 = 225,000
You can borrow $200,000 for a second mortgage. The maximum borrowing amount will vary from lender to lender and city-to-city.
To be clear, the likelihood of getting 85% of your homes value in Timmins may be more difficult to get than if you lived in Ottawa or another major city. The more populated a city, the more aggressive lenders tend to be.
If youre still wondering, How much can I get approved for a second mortgage? you can get a great idea by using our home equity calculator.
What Is A Home Equity Loan
A home equity loan is usually a fixed-rate loan distributed in one lump sum, with terms that range from 5 to 30 years. You pay it back in fixed monthly installments. This might be a good loan if you anticipate a large one-time expense such as a wedding, the purchase of a second home, or debt consolidation. A fixed rate and predictable monthly payment can help you budget as you work toward your financial goals.
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Second Home Mortgage Property Requirements
In addition, the property itself needs to meet certain guidelines. It must be:
- Occupied by the owner for some portion of the year
- A one-unit home
- Suitable for year-round use
- Owned solely by the buyer
- Not rented full-time or operated under a timeshare arrangement
- Not operated by a property management company that has control over occupancy
That first rule, which states you must occupy the home part time, is the most important.
Common Uses For A Second Mortgage
Second mortgages have few limitations. You can use the money you get through a second mortgage for the following expenses although it may not be the best way to finance these expenses.
Home equity loans and HELOCs are most commonly used for home renovations, particularly for large remodeling projects that require significant upfront investment.
Because second mortgages come with more favorable interest rates compared to credit cards and personal loans, they are sometimes used to consolidate higher interest debt. Financial experts advise caution when shifting unsecured debt to secured debt, as you risk losing your home if you cant repay.
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.