Equity in a home can be a powerful tool for homeowners. The ability to access equity for debts, investing or renovations are just a few of the reasons why someone would apply for a Second Mortgage. As a homeowner, you may be sitting on a substantial amount of equity.
If you're thinking about accessing that equity in the form of a second mortgage but have questions, this article is for you. We can help you understand how second mortgages work and advise if a second mortgage would be a good solution for you.
A second mortgage is a secured loan in which you borrow equity from a home you already have a "first" mortgage on. The second mortgage is registered in second place behind the first mortgage on the home. Your home equity is the difference between the appraised value of your home and how much you still owe.
Like the first mortgage, a second mortgage is secured by a lien on your property.
When you take out a second mortgage, you will have two mortgage payments to make each month. With a refinance, you're replacing an existing loan with a new loan, usually for better terms or lower interest.
A refinance is when you apply for additional funds through a new 1st mortgage. This can sometimes trigger penalties when the mortgage is broken. A Second Mortgage leaves the 1st mortgage untouched. Second mortgages usually have higher interest rates due to the risk posed to the second lender.
But don't let that scare you away from getting a second mortgage. There are many benefits to having a second mortgage. Let our mortgage specialists show you what we can do to help you!
Obtaining a second mortgage may be a bit smoother than getting your primary mortgage. The application and approval process is by far simpler and faster.
Lenders put more focus on the equity in the home. Equity is the security needed for lenders to consider approving and application or not.
With a second mortgage, it’s possible to borrow up to 85% of your home's value less the balance of your first mortgage.
Let's say you own a home worth $500,000 and still owe $250,000. You may be able to borrow $175,000 through a second mortgage.
($500,000 x 0.85) - $250,000 = $175,000
If you're unsure how much equity you have, you can try our Home Equity Calculator to get an estimate or talk to one of our mortgage specialists.
Most people take out a second mortgage in the form of a Home Equity Loan or Home Equity Line of Credit (HELOC). We'll break down the pros and cons of each one so you can see which may be best for you.
A Home Equity Loan is based upon the amount of equity you have in your home. They are typically fixed-rate loans in which you receive funds in a lump sum. You will also pay closing costs of approximately 2-5% of the second loan amount.
Pros of a Home Equity Loan
Cons of a Home Equity Loan
Home Equity Loans are great for people looking for short-term solutions.
A Home Equity Line of Credit (HELOC) is a revolving credit product that is secured to your home. It acts like a credit card because the homeowner can draw upon their equity as needed and make payments to pay off the balance. Like a credit card, the monthly payment is calculated on the amount borrowed.
Pros of a HELOC
Cons of a HELOC
HELOCs are great because they allow flexibility to use funds and repay them when needed.
There are many reasons for getting a second mortgage. In many cases, a second mortgage is faster, easier, and has lower interest rates than other forms of credit/debt.
Let's look at some of the most common uses for a second mortgage.
Looking for a faster, easier way to buy another house, pay off debt, or renovate your home?
If you've got good credit, we can help! Apply for a second mortgage today and get approved fast.
Before you decide to take out a second mortgage, we advise you to take the time to speak with a professional that can walk you through the process. Your home equity is one of your most valuable assets, so you don't want to waste it or, worse, run the risk of losing your home if you fall behind on payments.
A second mortgage could work well for you if:
One of the smartest reasons to take out a second mortgage is to renovate your home to increase your home's value and maintain your equity. There are many benefits to a second mortgage including interest rates that can be tax deductible on investment properties.
Before you decide to refinance, it's essential to weigh the pros and cons of a second mortgage. Here are the benefits and drawbacks you can expect when you take out a second mortgage. Please review them carefully, and don't hesitate to speak with a mortgage broker to learn more.
Pros of a Second Mortgage
Cons of a Second Mortgage
Interest rates are typically higher for second mortgages than first mortgages. The reason is that the second mortgage lender assumes more risk because they are second in line to be repaid if you fall into foreclosure.
The higher your loan-to-value ratio, the higher your interest rate will be. If you want to reduce the interest rate, try building more equity before you take out a second mortgage, borrow less, or improve your credit score. Borrowers with higher credit scores tend to get the best interest rates.
The process of getting a second mortgage is very similar to the one you went through to get your first mortgage. The main difference is that second mortgages do have fewer eligibility requirements. Keep reading to learn how to qualify for a second mortgage.
Below are the standard requirements for second mortgage approval. Requirements vary by lender, so these numbers serve as a guideline.
Lenders also have caps on the amount of your second mortgage loan. Your combined loan-to-value (CLTV) ratio is the balance of your first and second mortgage combined. Most lenders won't allow your CLTV to exceed 85% of the total appraised value.
If you've weighed the pros and cons and decided you want to take out a Home Equity Loan or a Home Equity Line of Credit, here is how to proceed:
Suppose you meet all the requirements and successfully get through the application process, congratulations! You are approved for a second mortgage.
Are you wondering, "How long does it take to get a second mortgage?" This process can be different for everyone as no two applications are the same. It could take as little as a few days to a few weeks.
Yes, but lenders may put stricter caps on how much you can borrow, require a higher interest rate, or require a co-signer.
Usually, there is no minimum required credit score for a second mortgage
Although second mortgages can be obtained with bad credit, it all depends on the equity position in the home. Obtaining a second mortgage with a low credit score likely means you'll be paying higher interest rates or using a co-signer on your loan.
You can also consider alternative financing options to help pay for your home improvements or debt consolidation. You may look at refinancing your home or applying for a HELOC.
Sometimes homeowners can make up for a low credit score by being stronger in other areas.
If you can, strive to:
Even if you improve in these areas, your credit score is still low, so you could get stuck paying a high-interest rate. It doesn't hurt to take measures to improve your credit score before applying for a second mortgage.
Improving your credit score may be quicker and easier than you realize. Here are some tips to increase your credit score in weeks or months.
Keep an eye on your credit score using sites like Credit Karma or Equifax. While these sites don't have completely accurate data, they will provide you with an estimate to help you track your progress and stay motivated.
Having a second mortgage means making two mortgage payments each month. Here are some tips to pay off your second mortgage quickly so you can get back to having one house payment:
You may be surprised how much you can save on interest over the life of your loan by making just one extra payment per year. If you would like counseling on how to pay off a second mortgage fast, reach out to LendToday.
Equity is the key...
Second mortgages are equity-based loans in the form of a Home Equity Loan or a Home Equity Line of Credit. For these types of loans, you should find the best second mortgage broker for you. Mortgage brokers have access to private second mortgage lenders who can base their decision on how much equity you have.
On the other hand, big banks have stricter rules in terms of credit, debt-to-income ratio, and other factors. If you fear that your application will be less than perfect, you may get turned down by a bank. The best second mortgage company is LendToday for equity-based second mortgage options.
At LendToday, our experts help people qualify for the loans they need. Even if you don't qualify with your bank, we will work with you to find the right second mortgage or financing solution to meet your needs. We base our decisions on your equity, so you owe it to yourself to apply for a mortgage where you'll be approved.
We don't make judgments. Mortgage solutions can help to repair credit and start your financial rehabilitation. There are options available if you have filed a bankruptcy or consumer proposal, lost your job, or maxed out your credit.
We look forward to assisting you. Apply online today, and we'll get back to you within 24 hours.
Living your dreams -- we can help with that!
Below you will find some of the questions we often hear in our office regarding second mortgages and alternative methods to draw upon your home's equity.
Yes. If you have enough equity after taking out a second mortgage to do a cash-out refinance and pay off your second mortgage, you can do so. After you pay off the second mortgage, you will return to having one mortgage payment.
Yes. You can take out a second mortgage to put a down payment on a vacation home or rental property.
Yes. You can refinance your second mortgage and include it into a new 1st mortgage.
Cash-Out RefinanceA Cash-Out Refinance is when you replace your original mortgage with a mortgage for a larger loan amount and receive the difference. To qualify, you must be able to afford larger monthly payments and have a substantial amount of equity in your home.
Reverse MortgageA Reverse Mortgage is for homeowners over age 62 with at least 50% equity in their current home. This type of loan lets you use your equity through monthly income checks, a line of credit, or a lump sum.
Learn more about your second mortgage alternatives. Contact us now.