What Is Taking Out A Second Mortgage

Taking Out A Second Mortgage

Breaking down the reasons to take out a second mortgage on your home

The process for taking out a second mortgage is similar to how you got your first mortgage. You’ll have to provide proof of your employment, income, credit score, and other debts. You’ll also need enough equity in your home. You’ll have to have your home appraised to get an estimate of its current value so the lender can assess the equity. The loan amount and interest will reflect all these factors.

You can begin the process by going to your bank or credit union and applying for a loan with them. Ask whether the lender charges application, origination, or appraisal fees. Not all lenders do. Be prepared for the interest rate on a second mortgage to be a bit higher than on your first mortgage, but it will often still be lower than with unsecured loans, such as personal loans or credit cards.

What Does Taking Out A Second Mortgage Mean

How to Use Home Equity to Buy Another House

Taking out a second mortgage means getting another loan–in addition to your original mortgage–that uses your home as collateral. Because your house is on the line, the stakes are high if you choose to take out a second mortgage. It is important to consider the financial implications of the new loan, the types of products available and your intended use of the money.

Second Mortgage Vs Home Equity Line Of Credit

Another financing option youve probably heard of before is a home equity line of credit, or HELOC. With a HELOC, you again borrow money against the equity of your home, with a standard 10 year draw period during which you can take out funds from that amount, usually followed by 20 years for repayment. Like a second mortgage, this creates a loan that is in addition to your first loan as opposed to replacing it like you would with a cash out refinancing.

As for choosing a second mortgage over a home equity line of credit, that again usually comes down to ratesthough in a different sense than refinancing. Second mortgage interest rates are typically fixed, meaning what you agree to on the day you close is what youll be paying during the life of the loan. A home equity line of credit, however, usually has a variable interest rate that can change over the course of the loan. If rates go up, you could end up paying more than you anticipated.

Also Check: Are Home Mortgage Rates Going Down

What Is A Second Mortgage And How Does It Work

9 Min Read | Jun 21, 2022

Maybe this has happened to you.

Youve been steadily paying off your mortgage when suddenly, you start getting letters from lenders inviting you to take out a second mortgage. “Build wealth!” they say. “Pay for your education! Renovate your house!”

The promises are tempting and the money seems legitimate. It cant be too risky, right?

Hold up! Before you get yourself in another mortgage bind, lets take a closer look at second home mortgages and why theyre not worth it.

When Should I Get A Second Mortgage

Second mortgages arent for everyone, but they can make perfect sense in the right scenario. Here are some of the situations in which it makes sense to take out a second mortgage:

You need to pay off credit card debt. Second mortgages have lower interest rates than credit cards. If you have many credit card balances spread across multiple accounts, a second mortgage can help you consolidate your debt.

You need help covering revolving expenses. Do you need revolving credit without refinancing? Unlike a refinance, HELOC s can give you access to revolving credit, as long as you keep up with your payments. This option can be more manageable if youre covering a home repair bill or tuition on a periodic basis.
You cant get a cash-out refinance. Cash-out refinances , compared to home equity loans, usually have lower interest rates. But if your lender rejects you for a refinance, you may still be able to get a second mortgage. Consider all of your options before you get a second mortgage.

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.

What Are The Pros And Cons Of Taking Out A Second Mortgage

Pros of a second mortgage

Second mortgages can be useful for paying debts or making purchasesincluding medical bills, consolidating debt, making home improvements, or putting aside an emergency fund. One of their advantages is that their interest rates are lower than credit cards and personal loans because theyre backed by your home, which makes them less risky for lenders.

Cons of a second mortgage

Second mortgages might sound tempting, but they are certainly not for everyone. While second mortgages do allow you to transform your home equity into cash and use it to pay for big purchases you may need, you are still turning your equity into debt that will have to be paid back with interest. In the long term, you will be paying more because of accrued interest and having multiple forms of debt. You are also more vulnerable to default on your loans in the event of a financial crisis, such as losing your job.

The consequences of missing a second mortgage payment are also worse than with your primary mortgage. Your lender can file a personal lawsuit against you or foreclose on your home if you stop payingso spending on non-essentials can be dangerous. Doing so will also negatively affect your credit. In addition, second mortgages make it more difficult to refinance and come with expensive closing costs.

Recommended Reading: What Are Home Mortgage Rates Right Now

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.

Using A Heloc As A Second Mortgage

What is a Second Mortgage?

Some borrowers use a home equity line of credit as a second mortgage. A HELOC is a revolving line of credit that is guaranteed by the equity in the home. The HELOC account is structured like a credit card account in that you can only borrow up to a pre-determined amount and make monthly payments on the account, depending on how much you currently owe on the loan.

As the balance of the loan increases, so will the payments. However, the interest rates on a HELOC and second mortgages, in general, are lower than interest rates on credit cards and unsecured debt. Since the first or purchase mortgage is used as a loan for buying the property, many people use second mortgages as loans for large expenditures that may be very difficult to finance. For example, people may take on a second mortgage to fund a child’s college education or purchase a new vehicle.

Recommended Reading: What Makes Mortgage Rates Change

What Is Home Equity

Unless youve paid off your mortgage, you dont technically own your whole house. You own a portion equal to the amount youve paid. Home equity is that portion of your house thats truly yours.

Its pretty simple to calculate: Just subtract your mortgage balance from the market value of your home.

For example, say your home was valued at $250,000 and you owe $150,000 on your mortgage. To figure out your equity, youd just subtract $150,000 from $250,000. That means your home equity would equal $100,000.

But thats assuming the market value of your home has stayed the same. More often than not, the market value fluctuates, so your equity will too, depending on which way the market blows.

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 youll 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

You May Like: Does Canada Have 30 Year Mortgages

Why Take Out A Second Mortgage

There are several reasons why someone might take out a second mortgage:

If youre struggling to get some form of unsecured borrowing such as a personal loan, perhaps because youre self-employed.

If your credit rating has worsened since taking out your first mortgage, remortgaging to a new mortgage to cover your house loan plus a further loan could mean you end up paying a higher interest rate on the whole new mortgage so you will pay more interest overall. Taking out a second mortgage means you would only be paying the higher rate and extra interest on the new amount you want to borrow.
If your current mortgage has a high early repayment charge, it might be cheaper for you to take out a second charge mortgage rather than to remortgage to release equity from your property .

The suitability of the examples above will depend on your personal circumstances. Provided youre up to date on your mortgage payments, its worth considering a further advance from your existing lender on better terms as it might be a better option.

Your Home Provides Shelter And Stability But It Can Also Be A Financial Tool

BURSAHAGA.COM” alt=”Second Mortgage Loan > BURSAHAGA.COM”>

If you own your home, you know it provides shelter and stability. But you might not have considered that your house has built up financial value, which you can tap into to meet other goals.

For many Americans, their home is their most valuable asset. As such, it can be a useful financial tool.

Equity is the difference between what your home would be worth in a sale and what you owe on your mortgage. As you make payments toward your mortgage principal over time, you increase your equity.

There are two primary ways to tap into your home equity: a home equity loan and a home equity line of credit . HELOANs and HELOCs are sometimes referred to as second mortgages. Because your home is used as collateral, they tend to have lower interest rates than personal loans or credit cards.

We see a lot of people doing home improvements and renovations, such as an addition or a pool, but we also see people take out a second mortgage for debt consolidation, to buy land or assist with college expenses, says DJ Coomer, Branch Manager at Regions Bank in Nashville, Tennessee.

Each home equity loan or line of credit type has its own terms and requirements, so its helpful to understand the differences.

Home Equity Loan

Home equity loans have a fixed interest rate, which means borrowers will pay the same interest rate over the term of the loan. This makes the monthly payments consistent over time.

Home Equity Line of Credit

Considerations When Borrowing Against Your Home

Content Type: Article

You May Like: What Does Taking A Second Mortgage Mean

What Happens To Underwater Homes

If your home is underwater , your second mortgage is effectively unsecured. So, if the second-mortgage holder foreclosed, the foreclosure sale proceeds wouldnt be sufficient to pay anything to that lender.

In most cases, if youre underwater and fall behind on payments for your second mortgage, the holder of the second mortgage probably wont start a foreclosure. Thats because all the money from the foreclosure sale would go to the senior lender. But the second-mortgage lender could still sue you personally for repayment of the loan.

Also Check: Mortgage Recast Calculator Chase

How Does Getting A Second Mortgage Work

Its where a loan secured on the property is given from a source other than the original lender.

The second lender takes second priority to the first lender. This means if the property ever needs to be sold, the first lender will have first call on equity in the property.

As with any mortgage secured on your property, failing to repay it could mean youll lose your property.

Your Second Mortgage Questions Answered

1. Whats a second mortgage, anyway?

A second mortgage is an additional home loan you take out using your house, instead of your earning potential, as collateral. As a result, second mortgages are often easier to acquire than a primary mortgage loan, as your property is providing the security for the loan not your paycheck.

2. What types of second mortgages are available?

There are essentially three types of second mortgages:

Home Equity Loans: In which you receive a lump sum you pay off via a fixed monthly payment over time . Loans of this kind most often have a fixed interest rate and are in addition to your primary mortgage. Most of the time you will not pay closing costs for a home equity loan.

Home Equity Line of Credit : This type of loan acts like a low-interest credit card, in which youre provided a pool of money you can draw from . Interest rates for this type of second mortgage loan are not fixed, and are usually situated somewhere near the prime rate plus whatever margin your lending institution adds.

3. What are the advantages of a second mortgage?

You mean, besides being able to purchase that new Corvette youve been dreaming of?

Some of the big financial advantages of a second mortgage include:

Low Interest Rates:Second mortgage interest rates are significantly lower than other forms of unsecured debt or private funding. Second mortgage rates are never as low as that of your primary mortgage loan.

4. What should I use my second mortgage for?

What Is The Difference Between A Second Mortgage And Refinance

What is A Second Mortgage & How To Apply For One In Canada

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 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.

Thats 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.

Dont Miss: What Is A Mortgage Holder

When To Get A Second Mortgage

While a second mortgage isnt right for everyone, it may be the right option for you. The following are some situations in which you may want to obtain a second mortgage:

You want to keep your mortgage terms: Getting a second mortgage may be the right option for you if you want a lump sum of cash without changing your mortgage terms. While you may pay more interest on your second mortgage, you will keep your interest rate on the primary mortgage. This may not be an option if you choose to refinance instead.
You dont know how much money youll need: If you have an ongoing home project and youre unsure how much money you will need upfront, a HELOC may be useful. With a home equity loan, you need to know how much youll need when you apply for this loan. When you secure a HELOC, you can make your payments as you go and use your line of credit up to the limit.
You want to pay credit card debt: Compared to credit cards, second mortgages tend to have lower interest rates. If you have multiple credit card balances, you may want to take out a second mortgage to consolidate your credit card debt.

You arent able to get a cash-out refinance: If you are rejected for a refinance, which tends to have a lower interest rate, you may be able to secure a second mortgage instead.

If you believe you can handle two monthly payments, a second mortgage may be the right option for you.