What Can You Use A Second Mortgage For
Second mortgages can be used for many purposes, though the exact uses depend on which type of second mortgage youve taken out. A down payment assistance loan, for example, could only be used for a down payment on a house.
Most of the time, people take out a second mortgage to either consolidate debt, do home improvements, or just use it as a line of credit to purchase something, Michael Sema, founder of Get A Rate, told The Balance via email.
A second mortgage, such as a home equity loan, may help you pay off higher-interest credit card debt faster. You may get a lower interest rate on the new loan than you had on your card, which could help you save money in the long run.
Second Mortgage: What It Is And How It Works
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A second mortgage is a home loan that allows you to borrow home equity while you already have a current or first mortgage on the property. Homeowners may choose a second mortgage to pay off debt, make home improvements or avoid mortgage insurance. Before you take out a second mortgage, its helpful to understand how it works and if it makes sense for you.
Should I Get A Second Mortgage If I Have Bad Credit
Although second mortgages are often difficult to qualify for with bad credit, its not impossible. Obtaining a second mortgage with a low credit score likely means that youll be paying higher interest rates or using a co-signer on your loan.
You can also consider looking into alternative financing options to help pay for your home improvements or debt consolidation. Both personal loans and cash-out refinances are good options to use if you have trouble qualifying for a second mortgage.
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Disadvantages Of Second Mortgages
The major downside of a second mortgage is that the loan is secured by your home, so you can lose your home if you dont repay the loan. Plus, you may have to pay significant fees to get a second mortgage , and your interest rate might not be that great, especially if you dont have a good credit score.
The Basics: How Does A Second Mortgage Work
A second mortgage can last up to 30 years, depending on how much you borrow.
To qualify you must:
Be a homeowner. You donât have to actually live in the house, as long as youâre the owner.
Pass an affordability check
The lender will check your credit history, current income and expenses in order to make sure you can afford the repayments. How much you can borrow and on what terms will partly depend on this assessment.
Have equity in your home
Equity is essentially the part of your home which you own outright. In other words, itâs how much your home is currently worth, minus whatâs left of your first mortgage. With a second mortgage you’re borrowing against the equity you’ve built up in your home. You can only borrow against the equity you have, not against the full value of your house. This means the more equity you have in your house, the more you’ll be able to borrow. The rest of your house’s value is tied up in your mortgage, meaning it can’t be used as security.
Letâs say you bought a house for Â£150,000. You put down Â£15,000 as a deposit and borrowed Â£135,000 to pay the rest.
Over a few years, youâve managed to pay Â£10,000 off your mortgage, which lowers your debt to Â£125,000. In the same time, the houseâs value has gone up, and itâs now worth Â£175,000.
This means your equity in the house is Â£50,000 .
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What Is The Difference Between A Second Mortgage And Refinance
A home is a place to live, an asset and a potential source of cash to cover upgrades, repairs or emergencies. If you want to leverage your homes equity to cover major costs, you may want to refinance your mortgage or secure a second mortgage. When you are considering a second mortgage vs. a cash-out refinance, weigh the pros and cons of both to determine which may be the right option for you.
The Types Of Refinances
There are two types of refinances known as a cash-out refinance and a rate and term refinance:
- Cash-out refinance: A cash-out refinance lets you access your equity in exchange for a higher principal. For instance, if you have a mortgage with a $120,000 principal balance and you want to do $30,000 worth of repairs on your home, you would accept a loan of $150,000. Youll then receive the $30,000 in cash after you close.
- Rate and term refinance: This type of refinancing lets you adjust how your mortgage is set up without impacting your principal balance. If you want to lower your monthly payment, you can accept a longer term. If you want to save on interest and own your house faster, you can shorten your loan term. You may also be able to refinance to a lower rate if market rates are now lower than when you obtained your mortgage.
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Types Of Second Mortgages
There are two main types of second mortgages: home equity loans and home equity lines of credit. With a home equity loan, the lender gives you a lump sum of money all at once, and you repay it at regular intervals over a set period of time. Typically, the interest rates are fixed. A home equity line of credit, on the other hand, works like a credit card, so you spend the money as you need it. Typically, interest rates are adjustable.
Differences Between A Second Charge Mortgage And Remortgaging
|Second charge mortgage|
Interest rates are typically higher than on first mortgages
Youll need significant equity in your home to borrow
Youll have two repayments on one property
Youll have higher outgoings each month
If you fail to make payments you could lose your home
Youll need to pay back both mortgages if you move
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Apply With Abby At Assurance Financial
Is a remortgage or second mortgage right for you? At Assurance Financial, we can help you finance your dream home at any stage of life. We can help you get the mortgage loan you need efficiently and offer end-to-end support to ensure the process goes smoothly. Our mortgage options for homebuyers include:
Our loan advisors at Assurance Financial want to help you with your mortgage today. Apply with Abby, our digital assistant and get pre-qualified in under 15 minutes, or contact us to learn more about the best option for you.
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.
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How A Home Equity Loan Works
A HEL uses the equity in your home as collateral. Equity is the value of your home that remains after subtracting the mortgages.
You would receive the loan proceeds as a lump sum, with a loan term ranging from five to 30 years. You’ll have to repay it plus interest in fixed monthly installments. There may be upfront fees, but the interest rate is fixed. It doesn’t change over time. This makes for predictable monthly payments.
Be sure that you can make the monthly payments. The lender can foreclose on your home if you don’t repay the HEL. A loan calculator like the one below is a good tool to use as you plan how you’ll manage future HEL payments:
Compare Second Mortgage Rates Faqs
If you are a homeowner, have sufficient equity in your home and meet the lending criteria, you should qualify for a second mortgage.
The amount you can borrow is based on how much equity there is. Different lenders have different rules, but the absolute maximum will be the amount of equity in the property.
You will need a formal valuation when you take on a second mortgage. The equity is the home’s value minus the amount owed on the mortgage. If you want to see what you might be able to borrow without paying for a valuation, you can get an estimate from an estate agent or check the sale price of other properties in the area.
When you move house, you need to pay off any outstanding amounts on both mortgages. You may be able to port one or both mortgages to a new property.
Yes. You can have a second mortgage , which is when you have two mortgages on one property. You may also have multiple mortgages for different properties if you own more than one house.
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How Much Stamp Duty Will I Pay
Standard Stamp Duty rates range from 2%-12% of the property price. Itâs only paid on properties over Â£125,000.
If you buy an additional property, you’ll have to pay an extra 3% in Stamp Duty, regardless of how much the second property costs.
From the 1st April 2016, anyone whoâs bought a second property in addition to their main home will pay:
- An additional 3% for the first Â£125,000
- 5% on a property which costs between Â£125,001 and Â£250,000
- 8% on a property which costs over Â£250,001.
Second Mortgages Vs Home Equity Loans
Home equity loans are another term for a second mortgage. As opposed to a home equity line of credit, which has a revolving credit limit, home equity loans are paid out in lump sums with fixed repayment terms. Both products use the original property as collateral to make it a secured loan and come in secondary priority to the primary mortgage in the event of a foreclosure.
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How Does A Second Mortgage Work When It Comes To Qualifying
Second mortgage lenders tend to care more about the amount of equity in your home than your income or credit score. So if youre interested in a second mortgage, it is important to understand how much equity you have in your home. If you do qualify, you may be wondering, how does a second mortgage work when I want to pay it back? Typically terms for second mortgages are for a year or two, during which you normally pay just interest payments. At the end of the term you need to pay back the total, extend the loan for another term or take out a new second mortgage to pay it off.
What Are The Requirements Of A Second Mortgage
One condition that comes with a second mortgage is that your mortgage lender will put a lien on your house when youre given a loan or cash. Liens are legal claims to properties that allow a lender to seize the property under certain conditions. When you secure a second mortgage, youll have two liens one with the lender of your primary mortgage and one with the lender of your second mortgage.
In this scenario, if you default on your home and the property goes into foreclosure, your primary lender will get their money first and the rest will go to your secondary lender. As a result, your secondary lender bears more risk and will likely offer you a higher interest rate.
Ensure you can comfortably make both payments each month. If you run into financial hardship, such as a job loss, you could be more likely to lose your house.
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How Can You Qualify For A Second Mortgage
Since second mortgages are risky for lenders, in order to qualify, lenders will look at the following:
- Equity: The more equity an applicant has, the higher the chance of qualifying for a second mortgage.
- Income: Lenders need to ensure that an applicant can make payments. Therefore, a dependable source of income increases the chance of qualifying for a second mortgage at a lower rate.
- An applicants credit score can determine the interest rate for the second mortgage. As a rule of thumb, the higher the credit score, the lower the interest rate.
- Property: Lenders need to secure the investment in the applicants property in the event that the applicant is unable to keep up with mortgage payments.
If you are retired and are unable to qualify for a second mortgage due to reasons such as low credit score and lack of income, there is another option. A reverse mortgage can act as a viable second mortgage for retirees.
Why Would You Use A 2nd Mortgage
Most people prefer to to another lender rather than obtain a second mortgage.
However, there are some situations where a second mortgage is more appropriate:
- If your first mortgage is a there may be high exit fees or you may not want to refinance because your fixed rate is much lower than the current variable rates. In this situation, you may borrow additional money using a second mortgage.
- If youre helping your children buy their first home then you may guarantee their loan using a second mortgage over your property.
- Private lenders: Many private lenders that can advance funds within 48 hrs will take a second mortgage behind a major bank as security for their loan but we recommend that you avoid using private lenders at all costs.
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Pros And Cons Of Home Equity Loans As A Second Mortgage
With a second mortgage or home equity loan, you can usually access a larger sum of cash for your goals. Especially if you have established a significant amount of equity in your home.
Because second mortgages and home equity loans are secured by your house, they typically have lower interest rates than other options. And, you can have 20 years or more to repay them, making the payments more manageable. As an added bonus, the interest paid on the loan may be tax deductible if you use the money for eligible home repairs.
However, second mortgages and home equity loans arent for everyone.
They can be very risky, for several reasons, cautioned Gutierrez.
Unlike personal loans, home equity loans can take much longer to process, so theyre not always helpful if you have an unexpected emergency expense. And depending on the lender, you may have to pay closing costs which can cost thousands to take out a second mortgage.
For those that are risk averse, using a home as collateral may be too risky since theres the potential for foreclosure if you fall behind on your payments. And by tapping into your homes equity, you increase your overall debt, so it will take longer before youre mortgage-free.
Generally though, why would you want to tack more years onto your mortgage? asked Gutierrez. Especially as you near retirement, a house payment makes it hard to stop working. Dont add a burden to what already may seem like an impossible task.
Differences Between Second Mortgages And Refinancing
Second mortgages tend to have higher interest rates than cash-out refinances. However, closing costs are typically higher for a cash-out refinance than for a HELOC or home equity loan.
While a second mortgage is an additional loan to your first mortgage, a cash-out refinance is a single, larger loan. You will have another payment to make when you get a second mortgage. And with a second mortgage, equity in your home may be only partially accessible. With a cash-out refinance, you may have the option to access all of your homes equity.
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What Is A Second Charge Mortgage
A second charge mortgage is an additional mortgage on an existing property you own. You can take out a second mortgage on the home you live in , but it is also possible to get one on other properties you own, as long as you meet the criteria. But it means having two mortgages on one property.
This type of finance is growing in popularity. The Finance & Leasing Association said there were 25,877 new second charge mortgages in 2021 a 44% increase from the previous year.
When you take out a second charge mortgage, you are accessing a secured loan, which uses the equity in your home as collateral. Youll also have your original mortgage, which means two lots of repayments to make each month.
The equity in your home will need to be large enough to allow a second mortgage and still leave a deposit.
The first lender has the first charge on your home if you default and the second lender has a second charge. If you default on either, you risk your house being repossessed.
Generally speaking, second charge mortgages are an option you might want to consider if you want extra funds but dont want to remortgage. For instance, because you will be hit by early repayment charges or fees if you remortgage, or if youve got a great deal you dont want to lose. You can take out a loan against the excess equity and make repayments over time.