Second mortgages are a good way to retrieve cash from your home equity to settle major expenses. We share how to get a second mortgage in this post, along with the requirements, pros, and cons. Read on.
What Is a Second Mortgage?
A second mortgage is a type of loan that allows homeowners to borrow money against the equity in their home, in addition to their first mortgage. This type of loan is secured by the borrower’s home, just like a primary mortgage.
Second mortgages usually have higher interest rates than primary mortgages because they are considered a higher risk for lenders. They are also typically smaller than first mortgages and have shorter repayment terms, ranging from a few years to 15 or 20 years.
Homeowners may use a second mortgage for various purposes, such as consolidating debt, funding home improvements, or covering unexpected expenses. However, it’s important to carefully consider the terms and conditions of a second mortgage, as failing to make payments can result in foreclosure and the loss of the home.
Related: How to Buy a House with Bad Credit
Types of Second Mortgage
Home equity loan
A home equity loan is a type of second mortgage that allows homeowners to borrow money against the equity in their home. Equity is the difference between the current market value of the home and the outstanding balance of the primary mortgage.
Home equity loans are secured by the borrower’s home and usually have a fixed interest rate and a fixed repayment term, typically ranging from five to 15 years. The loan amount is determined by the equity in the home and the lender’s loan-to-value (LTV) ratio, which is typically up to 80% of the home’s value.
Homeowners can use home equity loans for a variety of purposes, including home improvements, debt consolidation, or paying for college expenses. However, it’s important to carefully consider the terms and conditions of a home equity loan, as failing to make payments can result in foreclosure and the loss of the home.
Home equity line of credit (HELOC)
A home equity line of credit (HELOC) is another type of second mortgage. It is a revolving line of credit that allows homeowners to borrow money against the equity in their home, up to a certain limit.
Like a home equity loan, a HELOC is secured by the borrower’s home and the amount that can be borrowed is determined by the equity in the home and the lender’s loan-to-value (LTV) ratio. However, unlike a home equity loan, a HELOC has a variable interest rate and a draw period during which the borrower can access funds as needed.
During the draw period, which typically lasts for 5-10 years, borrowers can withdraw funds up to their credit limit and only pay interest on the amount they have borrowed. After the draw period ends, the borrower enters the repayment period and must make monthly payments that include both principal and interest.
HELOCs are often used for home renovations, debt consolidation, or other large expenses that may be spread out over time. However, as with any loan, it’s important to carefully consider the terms and conditions of a HELOC, as failing to make payments can result in foreclosure and the loss of the home.
How Risky Is a Second Mortgage?
Taking out a second mortgage can be risky, as it adds another layer of debt to your home and puts it at risk of foreclosure if you’re unable to make payments. The risk of a second mortgage depends on various factors, such as the borrower’s financial situation, the loan terms, and the state of the housing market.
One major risk of a second mortgage is that the interest rates are typically higher than those of a primary mortgage. This means that borrowers will pay more in interest over the life of the loan, which can significantly increase the total cost of the loan.
Another risk of a second mortgage is that it may be difficult to repay the loan if the borrower experiences a financial setback, such as a job loss or medical emergency. If the borrower is unable to make payments, the lender can initiate foreclosure proceedings and seize the home to recoup their losses.
However, if the borrower is financially stable and has a solid plan for repaying the loan, a second mortgage can be a useful tool for accessing the equity in their home to fund major expenses or investments. It’s important to carefully consider the risks and benefits of a second mortgage and to consult with a financial advisor or mortgage professional before making a decision.
Requirements for Getting a Second Mortgage
You’ll need a credit score of 740 or higher
A credit score of at least 740 is generally considered a good credit score and is often a requirement for a second mortgage because it indicates that the borrower has a strong credit history and is a low-risk borrower.
Additionally, borrowers with a credit score of 740 or higher may be able to qualify for better loan terms, including lower interest rates and reduced fees. This can help reduce the overall cost of the loan and make it easier for the borrower to manage their debt.
Submit your financial and personal documents to your lender
Submitting personal documents like tax returns, W-2 forms, pay stubs, and others is a requirement for getting a second mortgage because it allows lenders to assess the borrower’s financial situation and determine their ability to repay the loan.
When a borrower applies for a second mortgage, the lender will evaluate their financial status to determine if they are eligible for the loan. The lender will review the borrower’s income, expenses, debts, and credit history to determine their creditworthiness and ability to make payments.
Get a mortgage preapproval
Mortgage preapproval is a requirement for getting a second mortgage because it provides lenders with valuable information about the borrower’s creditworthiness and ability to repay the loan.
By obtaining preapproval, borrowers can demonstrate their commitment to responsible borrowing, while lenders can minimize their risk and ensure that the borrower is capable of managing the additional debt.
Also Read: How to Get Preapproved for a Mortgage
Verify your income and asset
Verifying your income and assets helps lenders assess your ability to repay the loan. By reviewing your pay stubs, tax returns, and other financial documents, lenders can verify your income and determine if you have a stable source of income to make the payments.
They may also review your bank statements and other asset documentation to determine if you have sufficient assets to cover the down payment, closing costs, and other expenses associated with the loan.
Allow a title company to perform a title search for the house
Allowing a title company to perform a title search for the house is a requirement for getting a second mortgage because it helps ensure that there are no liens, encumbrances, or other issues with the property’s title that could affect the lender’s ability to foreclose on the property in the event of default.
A title search protects both the lender and the borrower from potential legal and financial issues related to the property’s title. By ensuring that the property has clear title, the lender can make a valid lien on the property, and the borrower can have confidence in their ability to sell the property in the future.
What Can a Second Mortgage Be Used for?
Renovate and improve your home
One of the common uses of a second mortgage is to renovate or improve a current home. A second mortgage can provide homeowners with access to additional funds that they can use to make repairs or upgrades to their homes.
Home renovations and improvements can be expensive, and many homeowners do not have the funds available to pay for them outright. A second mortgage can provide the necessary funds to complete these projects, which can increase the value of the home and make it more comfortable and enjoyable to live in.
Make a down payment for a second home
Another common use of a second mortgage is to make a down payment on a second home. Homeowners who want to purchase a vacation home or investment property may use a second mortgage to fund the down payment.
The down payment on a second home can be significant, and many homeowners do not have the necessary funds available to make the purchase outright. A second mortgage can provide the additional funds needed to make the down payment, allowing homeowners to purchase a second property that they may not have been able to afford otherwise.
Pros of Getting a Second Mortgage
- Avoid mortgage insurance fees by buying a house with less than a 20% down payment
- Get up to 85% home equity in cash
Cons of Getting a Second Mortgage
- You risk losing your home if you can’t pay back the second mortgage
- Need a low DTI ratio and high credit score to qualify
- Risk of losing access to HELOC funds if your line of credit gets frozen by a lender
- Comes with closing costs
Final Thoughts
Having known these steps on how to get a second mortgage, you can initiate the process faster and use the cash from your home equity to sort out any expense that might be drowning you.
