A second mortgage is a second loan homeowners can take out in addition to their first mortgage. While refinancing replaces a first mortgage, a second mortgage is an entirely separate debt. A homeowner with a second mortgage makes two mortgage payments each month.
Second mortgages are an option for homeowners seeking cash. You can use second mortgage funds to:
- Make home improvements
- Finance Investments
- Pay for education costs
- Consolidate debt
- Cover unexpected expenses
Will I Qualify for a Second Mortgage?
If you have substantial equity built up in your home, you may qualify for a second mortgage. A good credit score and low debt-to-income ratio is a must for approval in today’s conservative lending market.
Obtaining a second mortgage can be a challenge because second mortgage loans are “riskier” than first mortgages. If a homeowner files for bankruptcy or the home is foreclosed, the lender holding the first mortgage is “first” to receive money when the home is sold.
How Much Can I Borrow?
The amount you can borrow with a second mortgage depends a lot on the amount of equity in your home. It may be possible to borrow close to the full amount of equity you have in your home, or in some instances, even more.
How Do I Apply for a Second Mortgage?
Applying for a second mortgage is basically the same as applying for a first mortgage. Your home must be appraised, and you’ll need to provide potential lenders with financial records, documentation and personal information just as you did with your first mortgage.
Where Do I Apply for a Second Mortgage?
Look for banks or financial institutions in your local area that advertise providing second mortgages. You can also research specialized lenders online that provide second mortgages to homeowners. Shop around to find a reputable lender who offers competitive loan rates and costs.
How much will a Second Mortgage Cost?
Interest rates for second mortgages are often higher than first mortgage rates since they involve more risk. Closing costs, fees and other expenses vary by lender, so it’s important to shop around for the best deal on a second mortgage.
Is a Second Mortgage a Smart Financial Move?
The only time it “makes sense” to take out a second home loan is if you can potentially recoup the amount you borrow plus interest. For instance, investing in higher education or using loan money to pay off high-interest credit card debts may be a smart move.
Using a second mortgage to take a vacation or buy an asset that will quickly depreciate is unwise.
Should I Refinance or Take out a Second Mortgage?
That depends on a variety of factors, including current interest rates, the amount of equity you have in your home, and the purpose of your loan, among other things. A quality lender will discuss the pros and cons of both options in your situation so you can make the best borrowing decision.
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