All About Getting Second Mortgage Loans
Just what are second mortgage loans, and are they right for you? Here’s what you need to know.
The world of real estate and mortgage lending can be a confusing one. Between industry terms, borrower requirements (which vary between lenders), and seemingly endless paperwork, things can get overwhelming pretty quickly. However, the reward of buying a home can often be worth navigating the process.
Mortgage lending doesn’t necessarily end when you sign your loan documents. To make things even more confusing, you can also take out what’s known as a second mortgage loan after you’ve been paying down your home loan for a while. You can then use those funds for a wide range of purposes. Just what are second mortgage loans, and are they right for you? Here’s what you need to know.
1. What Is a Second Mortgage Loan?
As you pay back your home loan, you build equity. That’s the portion of your home that you own, the value of the property that’s yours. In other words, it’s the difference between your home’s value and the remaining balance of your current mortgage. You can also accumulate equity actively by making home improvements (thereby increasing the value of your home) or passively when home values increase.
A second mortgage is a loan that allows you to borrow against the portion of your home that you own. Also known as a junior lien, this type of loan transforms your equity into readily usable funds, offering an alternative to selling your home if you need some extra money.
The two most common types of home equity loans are:
- Home equity loans. A home equity loan is a loan that provides you with a lump sum. Regardless of whether you use all of it or not, you have to pay back the entire amount. Typically, this loan comes with a fixed interest rate.
- Home equity lines of credit (HELOCs). With a HELOC, you have access to a line of credit that you can draw from as you need (up to a maximum amount determined by your lender). While it comes with a variable interest rate, you only need to repay what you use.
Like your first mortgage, your second mortgage requires that you use your home as collateral. Defaulting could result in losing your house. You’ll want to make sure that you can afford the additional payments before you apply.
2. Why Are They Helpful?
Second mortgage loans provide several significant benefits, which may include:
- Using the money how you need. There aren’t any restrictions as to how you can use the funds. That can make a second mortgage a more flexible financing solution.
- More affordable interest rates. In general, second mortgage loans have lower rates than those attached to credit cards. That’s because you use your home to secure the loan, whereas credit cards are typically unsecured.
- You may be able to get more money. Most lenders will allow you to borrow up to 80% to 85% of your total equity. If you’ve been paying on your mortgage for a while, you have the potential to borrow more money than you might qualify for with a personal loan.
3. When Are They Used?
Why get a second mortgage loan? One of the best features of second mortgages is that there’s a lot of flexibility. Unlike student loans or auto loans, you can use the funds for almost anything you need. Common uses for second mortgage loans include:
Home Repairs and Upgrades
One of the most common reasons people take out a second mortgage is to cover home repairs or upgrades. These projects can add up quickly, depending on what you’re looking to accomplish. For instance, the median cost of a kitchen upgrade was $12,000 in 2020. The best part about using second mortgage loans for these purposes is that the interest you pay may be tax-deductible.
If you’re making payments on high-interest credit cards, a second mortgage allows you to consolidate your debts into one, lower-interest monthly payment.
Some people find that a second mortgage makes more sense than student loans to fund the cost of their (or their child’s) college education.
Funding a Large Purchase
Perhaps you’re looking to purchase an engagement ring or want to take your dream vacation. If you’re confident you can pay the money back, a second mortgage can provide you with a way to finance the cost. Some people even use second mortgage loans to buy another house.
4. Who Can Get a Second Mortgage Loan?
To get a second mortgage loan, you have to own your home. You’ll also need to meet your lender’s requirements. Most lenders require that you have a minimum amount of equity in your home before you can qualify. In other words, you typically won’t be able to take out a second mortgage a month after you buy your house.
To get a second mortgage loan, you’ll also need to meet a lender’s credit score, debt-to-income (DTI) ratio, and other requirements. Those will vary between lenders, so make sure you know what you’ll need to have before applying.
5. Where Can You Get One?
If you’re wondering where to get a second mortgage loan, you have a few options. Your first is to go through your original mortgage lender. Many banks and credit unions that provide mortgages also provide second mortgage loans.
You can go through a brick-and-mortar financial institution to get a second mortgage, or you may also be able to go through an online lender. No matter who you choose, be sure to compare rates, look at the requirements, and read reviews first. That way, you can make the most informed decision possible.
6. How Can You Get One?
As for how to get a second mortgage, you typically need:
- A credit score of at least 620
- A debt-to-income ratio of no more than 43%
- At least 15% to 20% equity in your home
Before you apply, you’ll want to have a home appraisal to assess the current value of your home. Subtracting the balance of your first mortgage from that value can help you estimate how much you may be able to borrow with a second mortgage. You’ll also want to gather documents that show your income and existing debts before you apply.
Once you’ve chosen a lender and you’re sure you meet their minimum requirements, fill out the application. The lender may require additional documentation during underwriting, so be sure to provide it promptly. Upon approval, you’ll close on your loan (much like you did for your original mortgage) and receive the funds.
Convert your Home Equity to Cash
Is a Second Mortgage Loan Right for You?
Your home is your biggest asset. The longer you’ve been paying down your mortgage, the more equity you have. If you need money for home improvement projects or other large purchases, a second mortgage loan allows you to leverage that equity and make it work for you.
As with any loan, however, you’ll want to assess your current financial situation first. That way, you can know for sure that you can comfortably repay the money you borrow.
Instead of a second mortgage, another option is the sale-leaseback solution. With this option, you sell your home to EasyKnock, convert your home equity into cash to use towards paying down debt, starting a business, funding a life event, home renovations, and more. There’s no moving out. You stay in your home as a renter until you're ready to repurchase or move. EasyKnock has fewer restrictions than traditional lenders and can get you your cash in as little as 2 weeks.
See if you qualify for EasyKnock today and get the cash you need to reach your goals.
Amanda HoeyContent Marketing Manager
Amanda Hoey, Content Marketing Manager for EasyKnock, has applied her experience in public relations and content development to help produce educational and informative content for the financial and real estate industry. She is committed to bringing awareness and knowledge to homeowners about EasyKnock’s home equity loan alternative.