Second Mortgage to Leverage Your Home Value

Are you a homeowner with rising expenses? That can be extremely frustrating and make you hold back on various spending because it is not within your budget.

The good thing is there are multiple options to meet your expenses. One of them is generating higher by finding a higher paying job or through other investments. But those can take a long time, and you might not be able to wait.

So, here is a better idea for you to think about. Why not use your home equity to borrow money against it? That is what is known in the real estate world as a second mortgage.

All about Second Mortgage

This is the additional mortgage loan on top of the existing one. Just like the first mortgage, the loan amount is determined through the home equity you own and the outstanding home equity. 

By going for the second mortgage, your existing home is the collateral. So, if you default on your second mortgage, the lender has full authority to start the foreclosure proceedings and sell the home.

But remember, the second mortgage lender is not the only lender involved. You will also have the first mortgage lender as well. If you default and your home is foreclosed, the first mortgage lender will get the priority and get paid after the home is sold.

The remaining finances will be used to settle your debt with the second mortgage lender.

How Does Second Mortgage Work?

The process to obtain a second mortgage is usually the same as the first mortgage. 

You start by getting a home appraisal to know the home value of your current property.

Here is how Second Mortgage is calculated

A lender does not usually approve a loan on 100% home value. If you get a second mortgage at 80% to 85% home value, that is a good deal.

Let’s understand how a second mortgage loan is calculated by discussing an example.

Suppose your current home is worth $400,000, and your lender agrees to provide you with a second mortgage loan at an 80% loan-to-value ratio. From that $400,000, you own $300,000, and the rest 100,000 is the outstanding mortgage.

So, 80% of $400,000 (total home value) is $320,000. Now, we subtract $100,000 (outstanding home equity) from $320,000. $220,000 is the total second mortgage you can use.

Did You Know?
The interest paid with monthly payments is not considered in the second mortgage.

Requirements for a Second Mortgage

As good as a second mortgage sounds, you have to meet certain financial requirements to increase your chances for approval.

Here are some requirements that most lenders have.

• The Credit score has to be 620 or above
• The Debt-to-income ratio needs to be under 43%
• Outstanding home equity of less than 80%

Types of Second Mortgage

So far, after seeing the requirements and how the second mortgages are calculated, there would be one question you want the answer to. “How will we withdraw the second mortgages?”

We are way ahead of you, as that question will be answered when you know the different types of second mortgages.

Here are the two major second mortgages types.

Home Equity Loan

You get the entire second mortgage at once as a lump sum cash. That is what a home equity loan is all about. 

The home equity loan can be repaid through monthly payments with interest throughout the loan repayment.

Home Equity Line of Credit

This operates the same as a credit card, where you can withdraw the amount.

Here is an example of the home equity line of credit works. Suppose your lender approves a $20,000 home equity line of credit. You withdraw $5000 and return it within that month. That means you will still have $20,000 left to spend.

Remember, the home equity line of credit can be used for a specified period. This is known as the draw period. Once that period is over, you can either repay the loan as a lump sum payment or overtime. 

Pros and Cons of Second Mortgage

We have so far talked about what a second mortgage is, how it is calculated, and the two types of second mortgages.

But can you use it as your next home financing method? That is a question that can be answered when you know the pros and cons of a second mortgage, which will be done right now.

Advantages of Second Mortgage

In telling you the pros and cons of a second mortgage, we will first begin with the benefits.

Lower Interest Rates

In the real estate market, where interest rates usually burn a hole through homeowners’ pockets, second mortgages give comparatively lower rates. 

A major reason is that, unlike many other debts, the lender does not need the interest rate as collateral. They already have a lien over your home. 
 
No Restriction on Usages

Unlike many other additional loans like a college loan or a car loan, second mortgages do not have any condition on how you spend the money.

This loan can be used to make home improvements, buy dog food for your four-legged friend, or almost everything you may want.

High Amount of Credit

Depending on the lender how against how much home equity they are willing to approve the loan, it can well exceed your existing mortgage. This means second mortgages can help you access a lot of money.

Disadvantages of Second Mortgage

Instead of just telling you how nice a second mortgage is, we want to show you both sides of the coin. In other words, the pros and cons of a second mortgage.

Let’s look at some of the downsides you might want to know about.

Additional Monthly Expense

If the first mortgage was hard to repay, you have just added another one. This can exceed your monthly expense and make you revisit your budget as you will have additional monthly payments to make.

Risk of Losing Your Existing Home

One of the major differences when talking about the pros and cons of a second mortgage is that the conventional mortgage charges higher interest and other initial payments. This is to minimize the damage for the lender if you default. 

The second mortgage might have a lower interest rate, but they have your house as collateral. So, obtaining a second mortgage means you are risking losing your existing home.

Strict Eligibility

We have talked about how you need to have an above-average credit score, debt-to-equity ratio, and more. If you don’t need these requirements, you might not even be eligible for a second mortgage at all.

What’s Next?

Two heads are better than one. Similarly, the second mortgage can help you keep up with your recurring expenses and avoid unwanted financial stress.

If you are looking to relocate into a new home, check out the latest home listings at HAR.com. We are a Texas-based real estate that assists you in ending the search for your desired property.