You may have heard people talk about how they had to take “a second mortgage” on their house — usually this is used to describe a person’s personal financial problems.
A second mortgage is nothing more than a kind of loan, one that is made against the value of your home that already has a primary mortgage. The second loan is secured with your home equity.
Remember that home equity is not the value of your house, but the value of your house minus any money owed against it. Obviously this means that if your primary mortgage is relatively new and you owe a ton of money still, your second mortgage won’t be very valuable. You just won’t have the home equity.
Why Get a Second Mortgage?
Sometimes bad things happen. Situations can arise when you need to cash in your home equity by taking out that second mortgage. Nobody wants to be paying two mortgages but accidents happen.
If you’ve got a load of debt from car loans, medical bills, credit cards or college tuition you need cash now to pay it off.
A second mortgage is really only ideal if you know you can afford it. If you have an investment opportunity that you know will pay off or if your financial salvation is just over the next ridge — if you’re completely confident in your financial future and just need to bridge the gap — then you should take a second mortgage.
How Much Money Can I Get?
A second mortgage is basically a second home loan. Most banks and lenders will allow you to take a second mortgage under certain financial conditions. For instance, it is common that the total loan-to-value ratio of your first and second loan is equal to 85% of the home’s appraised value. Sounds complicated, but a lender can do the math for you really quick. Don’t fret if your numbers don’t work out — there are always other lenders to look for. The two states where you’re not gonna find easy second mortgages (that is mortgages equal to 125% of the appraised value) are Texas and West Virginia. Those states have laws restricting second mortgage rules.
Second Mortgage Terms and Options
No doubt about it, the interest rates on a second mortgage are going to be higher than your first loan. This is because of the higher risk associated with a second mortgage.
You do have a choice when it comes to the type of second home loan you take on. You can pick a fixed-rate or adjustable-rate home equity line of credit. When you talk to your lender, you’ll get a quote depending on your credit score, the current market, and a few other egghead factors. Your loan will be for somewhere between 15 to 30 years depending on which loan you choose. Most second loans are for a shorter period of time than the first.
Another side note — your second mortgage is of a lower financial priority than your primary mortgage. This means you need to be willing to default on your second loan before you default on the primary, should it come to that. The primary loan should always be paid off before the secondary, even though the second mortgage may be easier to pay off.
How Do I Get a Second Mortgage?
Acquiring a second mortgage on your home is remarkably similar to the process of taking out your first home loan. Always shop for the most suitable loan offer available by talking with a variety of lenders and amassing a ton of different quotes.
This isn’t as complicated as it seems. The easiest way to get quotes is to fill out a single “no-obligation” query form available at various lenders to get a range of quotes from the various lenders in your community.
Once you compare the different quotes, you do have a bit more work to do. Figure out which home loan offer will end up costing you less in the long run (the “best” quote you get may not be so great when you look long term) and make sure to file all the proper paperwork.
The lender you choose will go through an appraisal of your home. This is done to make sure that the current market value the company has is accurate. The lender will then complete all the steps that are necessary to complete the loan processing with the bank so that the lender can arrange for the loan’s closing — assuming the home inspection went well.
At closing, you will be signing the note and a ton of other documents as required by your lender and state law. Just like with your primary loan, you will have to pay certain closing costs. They vary from lender to lender and state to state.
I’ve Got the Mortgage — What Happens Now?
First, take a deep breath.
Right now you should refinance the primary home loan — make sure you’ve earned the second mortgage before you do this. Immediately you should ask your lender for what is called a “subordination of the second loan”. This is legalese that means that your second home loan should be considered a lesser lien compared to that of the refinanced and primary loan.
If you do not subordinate the second loan, the second mortgage will be taken up as the first lien and the refinanced primary loan will shift into second lien. This is bad. If this happens, the risk associated with the refinanced primary loan will skyrocket, and you will end up paying a bundle in refinancing charges. Trust me on this one, subordinate the loan.
A second home mortgage can be your stepping stone to financial freedom — a second home loan is gonna put a wad of cash in your pocket right when you need it. Even better, the interest on your second mortgage, if handled properly, is tax deductible, with limitations.
Remember that defaulting on your second loan is just as bad as defaulting on your primary. You can lose your home. Also, don’t overlook the high price and bad interest rate you get when you take on a second mortgage. Be sure you have worked out a budget that allows you to take a second mortgage without losing your house.