Second Mortgages Explained
A second mortgage, or home equity loan, lets you borrow
money against the equity in the appraised value of your house. If your home’s
value is put at $200,000 but you only owe $150,000 on your current mortgage,
you have $50,000 in home equity.
Lenders let you borrow anywhere between 80% and 95% of that
home equity, using your home as the collateral against the loan. The funds are
delivered as a lump sum and you’ll begin repayments over a fixed period of
time. Your monthly payment amount won’t change over time, so you’ll know
exactly what to expect.
In order to qualify, you’ll need to get approved through a
lender. This doesn’t necessarily have to be the same mortgage lender you work
with; instead, you can pick anyone approved in your state in order to get the
best terms possible.
As part of the initial application, the lender will review
the following criteria:
- Your credit score
- Your debt-to-income ratio
- The amount of equity in
To complete that last piece of the puzzle, the lender will
order an appraisal of the home, which determines the current home value. You’ll
generally have to pay this cost out-of-pocket, which can be a few hundred
dollars, depending on where you live. Once your application is complete and is
approved by your lender’s underwriter, you’ll be able to close on the loan and
receive your funds.
Because your home’s value is involved, it can take 30 days
or longer to complete the entire process for a second mortgage, making it much
slower compared to a personal loan.
Why Use a Second Mortgage
One of the perks of getting a second mortgage is that you
can use the funds for just about anything. Whether or not this is the best idea
is up to you, since your home is being used to secure the loan. Common reasons
why homeowners take out home equity loans include:
- Debt consolidation or
credit card/loan payoff
- Home improvement projects
- Large purchases like a new
- Life events like a wedding
- Medical debt
It’s really important to weigh the importance of your fund
use against the inherent risk involved with a second mortgage. Just like any
type of financing decision, you really need to prioritize to make sure your
extra expenditures are manageable within the context of a second mortgage.
Pros and Cons
The biggest advantage of a second mortgage is that the
interest rates are generally much lower compared to other types of financing,
such as a personal loan or credit card. You’ll also receive a fixed rate on the
new loan, so you can be consistent with your payments each month and easily
The major downside, however, is that if the real estate
market drops in your area, you could easily become underwater on your home
because you don’t have as much equity as you once did.
If you need to sell your home at any point, a second mortgage limits the flexibility you have in your asking price and may take you longer to find a buyer.
On top of that, if you lose your job or can’t work anymore
for some reason, you have less breathing room each month when you have two
mortgage payments to make. Defaulting on even your second mortgage could result
in going into foreclosure if you can’t make your payments on time.
Consequently, it’s a huge risk and should be appropriately weighted before
making a final decision.
Finally, a second mortgage comes with a few logistical
disadvantages. As briefly mentioned, closing is much longer compared to other
types of loans. In fact, it can take anywhere between 30 and 45 days depending
on how busy the lender and appraiser are at the time.
You may also have to pay closing costs as part of your
second mortgage, which can range between 2% and 5% of your borrowed amount. If
you borrow $30,000, for example, you could pay an additional $600 to $1,500 to
Other Financing Alternatives
When you’re not sure if a second mortgage is right for you
(or if you don’t have enough equity in your home), consider one of these
Home Equity Line of
A HELOC still uses your home equity to secure the funds, but
you can simply tap into an approved line of credit little by little, rather
than getting a lump sum all at once. This comes with a few distinct advantages.
For one, you only pay interest on the amount you borrow. As you pay it back,
you can borrow more or rest easy knowing that you have a back-up line of credit
available should you need it.
Another advantage is that you can pace yourself as you
monitor your local real estate market. If you notice a dip in sales prices
nearby, you may decide to stop tapping into your HELOC. Of course, your ability
to do that depends on what the funds are being used for.
You won’t get the same low rates as you would with a second
mortgage, but an unsecured personal loan doesn’t require any of your property
as collateral. If you default, you’ll still face some financial and credit
repercussions, but you won’t be at risk of losing your home.
Another benefit is that you don’t need excellent credit to
apply for a personal loan. You can find lenders willing to work with a range of
credit profiles, whereas most home equity lenders tend to approve only those
with stronger credit.
You may not be able to use your credit card for everything
(and you probably shouldn’t, anyway), but if you’re in a cash crunch, you could
consider financing an emergency this way rather than taking the risk of a
Frequently Asked Questions
How do you qualify for this type of loan?
The primary qualification is the amount of equity you have in your home. Lenders allow you to borrow a certain percentage of your closed loan to value (CLTV) ratio. In most cases, you can borrow as much as 95% CLTV. Other qualifications lenders look at are your credit score and debt to income ratio.
What’s the difference between a home equity loan and a second mortgage?
A home equity loan and a second mortgage are the same thing: a loan delivered in a lump sum that is repaid in installments over a fixed period of time. A related product is a home equity line of credit (or HELOC), which lets you access funds as you need them while only paying interest on the amount you actually use.
Can you get two second mortgages on the same house?
It is possible to secure multiple mortgages against your home, but each one must be prioritized so that in the event of a foreclosure, each creditor is paid in succession to avoid conflicts. Your original mortgage is the first lien, then the first home equity loan would be in the second lien position. A subsequent home loan would then be placed in the third lien position.
How much can you borrow?
The amount you can borrow depends on the lender. The maximum in most cases is 95% of your closed loan to value, which you can determine based on this calculation:
(Loan amount + current mortgage balance) / home’s appraisal value
Get a Second Mortgage Today
To tap into your home equity for financing, get a second mortgage loan quote today!