What Is a Second Mortgage?

A second mortgage is a type of loan taken out on a property or home that currently has a mortgage loan. A first mortgage is a loan typically used to purchase a home, while a second mortgage is a loan taken out on the equity of the home. As you pay down your mortgage, equity or o🥀wnership buildꦿs over time. A second mortgage allows you to tap into the home equity and take out a second loan.

A second mortgage is subordinate to the first mortgage. If the borrower defaults on the payments, the original or first mortgage will receive all proceeds from the property’s liquidation until it is paid off. As a result, the 澳洲幸运5官方开奖结果体彩网:interest rate charged for the second mortgage tends to be higher, and the amount borrowed is lower than that of the first m♎ortgage.

How a Second Mortgage Works

When most people purchase a home or property, they take out a home loan from a lending institution that uses the property as 澳洲幸运5官方开奖结果体彩网:collateral. This home loan is called a mortgage, or more specifically, a 澳洲幸运5官方开奖结果体彩网:first mortgage. The borrower must repay the loan in monthly installments made up of a portion of the 澳洲幸运5官方开奖结果体彩网:principal amount and interest payments. Over time, as the homeowner makes good on their monthly payments, the home also tends to 澳洲幸运5官方开奖结果体彩网:appreciate in value.

The difference between the home’s current market value and any remaining mortgage payments is called home equity. A homeowner may decide to borrow against their home equity to fund other projects or expenditures. The loan they take out against their 澳洲幸运5官方开奖结果体彩网:home equity is a second mortgage, as they already have an outstanding first mortgage. The second mortgage is a 澳洲幸运5官方开奖结果体彩网:lump-sum payment made out to the borrower at the beginn♔ing of the ཧloan.

Like first mortgages, second mortgages must be repaid over a specified term at a fixed or variable 澳洲幸运5官方开奖结果体彩网:interest rate, depending on the loan agreement signed with the lender. The loan must be paid off first before the borrower can take on another mortgage against the🙈ir home equity.

Using a 澳洲幸运5官方开奖结果体彩网:mortgage calculator is a good resource to budget these costs.

Using a HELOC as a Second Mortgage

Some borrowers use a 澳洲幸运5官方开奖结果体彩网:home equity line of credit (HELOC) 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 st꧋ructured like a credit card account in that you can only borrow up to a predetermined amount and make monthly payments on the account, depending on how much you currently owe on the loan.

As the balance of the loan inc♓reases, 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 pur♔chase a new vehicle.

Requirements for a Second Mortgage

To qualify for a second mortgage, you will need to meet a few financial requirements. You typically will need a 澳洲幸运5官方开奖结果体彩网:credit score of 620 or higher, a 澳洲幸运5官方开奖结果体彩网:debt-to-income (DTI) ratio of 43% or lower, and a decent amount of equity in your first home. Because you are using the equity in your home for the second mortgage, you will need to have enough to not only take out your second loan but also to be able to keep approximately 20% of your home’s equity in the first mortgage.

Special Considerations

Borrowing Limits

It may be possible to borrow a hefty amount of 澳洲幸运5官方开奖结果体彩网:money with a second mortgage. Second mortgage loans 澳洲幸运5官方开奖结果体彩网:use your home (presumably a significant asset) as collateral, so the more equity you have in a home, the better. Most lenders will allow you to borrow at least up to 80% of your home’s value, and some lenders will let you borrow more.

Approval Time

Like all mortgages, there is a process for obtaining 澳洲幸运5官方开奖结果体彩网:a HELOC or a home equity loan, and the timeline may vary. You will need to apply for an 澳洲幸运5官方开奖结果体彩网:appraisal of your home, and it usually takes the lender’s 澳洲幸运5官方开奖结果体彩网:underwriter a few weeks to review your application. It could be four weeks, or it could be longer, depending on your circumstances.

Second Mortgage Costs

Just like the purchase mortgage, there are costs associated with taking out a second mortgage. These costs include 澳洲幸运5官方开奖结果体彩网:appraisal fees, costs to run a 澳洲幸运5官方开奖结果体彩网:credit check, and 澳洲幸运5官方开奖结果体彩网:origination fees.

Although most second-mortgage lenders state that they don’t charge 澳洲幸运5官方开奖结果体彩网:closing costs, the borrower still must pay closing costs in some way—the cost is included in th🌠e total price of taking out a second loan on a home.

Since a lender in a second position takes on more risk than one in the first position, not all lenders offer a second mortgage. Those that do offer them take great steps to ensure that the borrower is good to make payments on the loan. When considering a borrower’s application for a 澳洲幸运5官方开奖结果体彩网:home equity loan, the lender will check whether the property has significant eq🌳uity in the first mortgage, a high credit score, a stable employment history, and a low debt-to-income ratio.

Advantages and ꩲDisadvantages o𒆙f a Second Mortgage

Taking out a second mortgage means you can access 澳洲幸运5官方开奖结果体彩网:a large amount of cash using your home as collateral. These loans often come with low interest rates plus a tax benefit. You can use a second mortgage to 澳洲幸运5官方开奖结果体彩网:finance home improvements, pay for high🧔er education costs, or consolidate d๊ebt.

However, there are risks when taking out a second mortgage, and they can be substantial. Notably, you risk losing your home if you can’t make payments. Expect to pay cloဣsing costs, appraisal fees, and credit c♐hecks during the process.

Second Mortgages vs. Home Equity Loans

Home equity loans are a type of second mortgage. With a home equity loan, you are paid a lump sum and repay the loan in fixed monthly payments. On the other hand, a home equity line of credit (HELOC) has a revolving credit limit that you can draw on as needed for a period of time. Both products use your home or property as collateral to make it a secured loan and come in secondary priority to the primary mortgage in the event of a 澳洲幸运5官方开奖结果体彩网:foreclosure.

The Bottom Line

If you qualify for a second mortgage, it can help you pay for home improvements and major renovations, make a 澳洲幸运5官方开奖结果体彩网:down payment on a second home, or pay for your child’s college. Second mortgages can also be a method to 澳洲幸运5官方开奖结果体彩网:consolidate debt by using the money from them to pay off other sources of outstanding debt, which may carry even higher interest rates.

Because the second mortgage also uses the same property for collateral as the ꦺfirst mortgage, the original mortgage has priority on the collateral should the borrower default on their payments. If the loan goes in💧to default, the first mortgage lender gets paid before the second mortgage lender. This means that second mortgages are riskier for lenders, which is why they ask for a higher interest rate on these mortgages than on the original mortgage.

You don’t necessarily have to take out a second mortgage from your first mortgage lender. When you are shopping around for a second mortgage, it is advisable to get rate quotes from a variety of sources, including banks, 澳洲幸运5官方开奖结果体彩网:credit unions, and online mortgage lenders.