Second Mortgage
What is a second mortgage?
Basically, it's a second loan you take against your property in addition to your primary and usually larger, first mortgage. There are two types of second mortgages: home equity loans and home equity lines of credit (HELOC).
What is the difference between a home equity loan and a home equity line of credit (HELOC)?
A home equity loan is when a lender gives you a lump sum of money and you pay it back over a fixed payment schedule - just like your primary mortgage. Typically these loans have fixed interest rates.
A HELOC allows you to borrow up to a certain amount of money from a lender until you've reached your limit (e.g., a line of $30,000). The "line" is a credit line guaranteed by your house. HELOCs have adjustable interest rates.
Why would someone need a 2nd mortgage?
For a variety of reasons:
- Avoid Private Mortgage Insurance (PMI)
- Consolidate debt
- Make home improvements
- Use equity to buy another home
- Create a home equity line of credit (HELOC)
- Pay for college tuition
- Start a business
Where does the money come from for a second mortgage?
It comes from your home. Essentially, you are borrowing against the money - or, equity - you have in your home.
Can I use a second mortgage to buy a car or go on vacation?
You can, but experts agree it's not wise to do. These can be considered frivolous reasons and owing money on a first mortgage is already difficult without the added burden of paying on a second mortgage.
What are interest rates like on second mortgages?
Usually, interest rates on second mortgages are higher than the first mortgage because in case of default, it's unlikely the second mortgage will be paid off because the first mortgage takes priority. It also depends on your loan-to-value ratio and credit score.
Are there closing costs for second mortgages?
Absolutely. Usually the costs are 3% to 6% of the loan amount. There are appraisal fees, application costs, credit score fees, recording fees, and possibly title and escrow fees, among other administrative fees.
How much money can I borrow in a second mortgage?
It depends on the equity in your home and the lender. Your equity is the difference between the current appraised value of your home and the amount you owe on it. Lenders will usually allow you to borrow up to 85% of the total loan-to-value ratio of your first and second loan.
Where can I get a second mortgage?
While some people think they need to go to the same lender as they did for their primary loan, that is incorrect. They can get a second mortgage from any lender. And, just like your primary loan, make sure you shop around and get a good faith estimate (GFE)! Learn more about getting a Home Equity Loan or a HELOC.