With prices rising monthly over the past 21 months, home values are almost record highs. If you already own a home, that’s good news. The average mortgage-holding homeowner had $303,000 in stock at the end of 2024, according to property information and data analyst Cotality.
If cash is needed, the homeowner can tap on his own shares to prepare his own shares by taking out a second mortgage. This is similar to the main mortgage (the mortgage where you purchased the home), but there are some important differences.
Before you can take fairness from your home, you need to understand how a second mortgage works and whether it makes sense to you.
What is the second mortgage?
Most people consider a mortgage to be a loan to buy a home. However, once you become the owner, you can continue to rent. The second mortgage sounds exactly like that. Another loan that uses your home as collateral.
The original mortgage is known as the first or primary mortgage. Not only did you take it out first, but also because mortgage lenders have their first dibs in the house if they defaulted to payments. Additional loans to property are known as a lower mortgage or lower lien. As the name suggests, this second mortgage is the third year of your first mortgage in terms of reimbursing your creditor or lender.
When you take out a second mortgage, you borrow against the shares you have built up in your home. Fair refers to the amount of the house you own entirely, as opposed to the amount you still owe. In other words, the difference between the value of your home and the remaining balance of your first mortgage.
How does a second mortgage work?
Anyway, the second mortgage is very similar to the first mortgage in the first stage.
To get a second mortgage, you usually need to do the same thing you did to qualify for a major mortgage. This process involves submitting an application to the lender and providing documentation about income, liabilities and assets. You may also need to get an valuation to see the current value of your home and pay for the closing costs (though some lenders have covered them for you). Finally, if you do not meet the terms of payment, you will need to sign a document that stipulates what the lender can do.
Although second mortgage eligibility varies, many lenders prefer that their home has at least 15% to 20% capital. Usually you can deduct up to 85% of your home’s value from your current mortgage obligations. For example, if you have $300,000 and $200,000 remaining homes on your first mortgage, you might be able to borrow $55,000 on your second mortgage: (300,000 x 0.85) – $200,000.
Requirements for applying for a second mortgage
To apply for a second mortgage, you must meet the following requirements:
- You own at least 15% to 20% of the home entirely
- You have remaining balances on your current mortgage. This is less than 80% to 85% of the home’s value
- My credit score has a credit score of 620 (at least, a higher score is highly recommended to qualify for the lowest rate).
If I have poor credit, can I get a second mortgage?
Eligibility for a second mortgage with poor credit is particularly challenging, as lenders set high levels of these inherently risky loans. Many expect FICO scores to be the lowest “good” (670) or high “fair” (640-669).
Still, you can approve the loan, especially if you have a significant equity stake. To improve your chances, try out a major mortgage lender first (assuming a second mortgage is offered). Another option is to protect co-signers with a strong credit profile. This makes you a more attractive candidate.
If approved, expect higher interest rates and stricter terms: the price you pay for non-Bright credits.
What are the advantages and disadvantages of getting a second mortgage?
A second mortgage can be useful in a variety of situations, but there are drawbacks to consider.
Types of Second Mortgages
Borrowers who want to take their second mortgage can choose from two basic types: Home Equity Loan or Home Equity Credit Line.
Home Equity Loan
A home equity loan works like your first mortgage. You will receive all your money in advance and pay it back over time with interest in fixed monthly payments. These loans are perfect for situations where you need a large amount of cash at once. For example, you could pay off large debts, such as kitchen renovations or new swimming pools, or pay one-off expenses.
Please research your current home equity loan fees before applying. Prices are usually a few percentage points higher than the mortgage rate. Bankrate’s Home Equity Loan Calculator can help you see if such a loan makes sense to you and how much money you can tap.
Home Equity Credit Line (HELOC)
HELOC is the same credit line as a large credit card. Once it is established, you can draw as often as you need, over a few years. You will only charge interest on the amount you actually withdraw. You can repay the amount you want to borrow and then borrow it again.
Helocs can be a great option if you don’t know exactly how much money you need, or if you don’t know if you need it for a long period of time. Examples include paying college tuition fees and embarking on remodeling projects like adding homes, which takes quite a few months and will be refunded in stages of the contractor.
HELOC interest rates are typically a few percent higher than the mortgage rate, slightly above the home equity loan rate. However, unlike the other two, it is usually variable. That is, they can generally fluctuate, rise and fall with interest rates.
What is the difference between a second mortgage and a refinance?
Refinancing a mortgage is completely different to getting a second mortgage.
For refinancing, you replace the original mortgage with a whole new loan with a new rate and a new term. When you get a second mortgage, you add another loan that offers two separate payments each month, and you will maintain that first mortgage (a good move if it has an attractive rate on its outstanding balance).
Another important difference is timing. Refinance takes as long as you can get your first mortgage. Depending on the lender, consider closures for 30-60 days. If you choose a second mortgage, especially HELOC, you may have access to your funds significantly faster.
When cash-out refinance makes sense
There are certain types of refinances that allow you to tap on your home equity as well: cash out refinance.
With cash-out refi, you can take out a new mortgage with a larger balance than your current mortgage and pocket the cash difference. The extra amount is based on the value of your home equity. Of course, this move leaves you with bigger loans to pay back, leaving you with a large monthly payment (usually fixed).
In addition to getting cash, refinancing is a good option if you want to adjust the repayment period of your existing mortgage or secure a lower interest rate on your new loan. Plus, you only get one payment per month, rather than two separate payments (as if it’s the second mortgage).
When Home Equity Loan or HELOC makes sense
If you want to stick to the low fees on your current mortgage, or if you’re not sure how much money you need or how much money you’ll need, a Home Equity Loan or HELOC is the better option. However, if you own a fair portion of your home free and clearly, they work best, as your outstanding mortgage balance will affect the size of the additional loans you can get. If you still borrow a lot, Refi might be a better scenario in the end.
Final Words about Second Mortgage
A second mortgage can sound daunting – it’s another lien on the roof above your head. However, it can become a valuable weapon in your financial toolbox. If you pay off a substantial amount of principals on your main mortgage and have excellent credit, the second mortgage will help you access capital at a competitive rate to pursue other life goals, such as improving your home, funding your business, and paying for your children’s college tuition.
It’s attractive, but taking away the second mortgage should be addressed with the same level of care and considerations as used on the first mortgage. Can you really afford to pay? Are you 100% confident in your repayment plan? Remember, you don’t forget to take on more debts while you place your home on the line. This means that missteps can have disastrous consequences.
