Second mortgages can be a great way of using the equity in your house to free up cash for important needs. Before you start the application process, review these FAQs and requirements related to second mortgages.
Second Mortgage FAQs
What is a second mortgage? Is it the same as a home equity loan?
A second mortgage and a home equity loan are two terms for the same thing. A second mortgage is a loan secured by your home where you leverage your home equity to get cash for your needs. Home equity is the difference between the value of a home and what is still owed on the mortgage. For example, if the market value of your home is $300,000 and you owe $200,000 on the mortgage, you have $100,000 in home equity. Second mortgages typically have a fixed interest rate, fixed monthly payment and fixed term. Lenders are likely to encourage you to use it for things that have long-term or significant value, such as home improvements, debt consolidation, education expenses and other major expenses rather than simply for everyday or unnecessary expenses.
How much money can I take out in a second mortgage?
Generally your first and second mortgage together have a top limit of 90 percent of the appraised market value of your home. Many lenders use what’s called a closed loan to value (CLTV) ratio. CLTV is calculated by taking your existing mortgage balance(s) plus your desired loan amount, divided by your home value:
CLTV = (Loan Amount + Mortgage Balances) / Home Value
Using the previously mentioned example, here’s how you can determine how much you can borrow:
.9 = (x + $200,000) / $300,000. In this case, x=$70,000, meaning you may be able to borrow $70,000 through a home equity loan. Some lenders, like Discover, offer loans up to 95% CTLV depending on your credit score. To determine your rate and monthly payment on your desired loan amount, use a home equity loan calculator.
What are the requirements?
Similar to a first mortgage, you will need to demonstrate employment, sustained income, good financial history and credit score, listings of your other debts and of course have sufficient equity in your home. Lenders will verify your employment and income information by reviewing your most recent W2 forms as well as your most recent paycheck stubs covering 30 days, if applicable. If you’re self-employed or receive income from other sources than an employer, you’ll need to provide your most recent federal income tax returns. Your lender will conduct an appraisal of your home to confirm its current market value. Your lenders will access your credit report to determine your credit score. Your qualification and interest rate will be determined by all of these things.
What are the terms and payback period for a second mortgage?
Lenders assess higher risk to second mortgages than to first mortgages because first mortgages take precedence in receiving proceeds from the sale of a home in the event of foreclosure. Because of this risk difference, second mortgages generally have somewhat higher interest rates than first mortgages, but both are usually lower than unsecured loans like personal loans or credit cards. Terms for second mortgages range from 1 to 20 years, as compared to first mortgages up to 30 years.
What is the difference between a second mortgage and a home equity line of credit?
A second mortgage and a home equity line of credit (HELOC) are similar in that they both use your home’s equity as collateral and will show up on your credit report. However, a second mortgage is a fixed amount lent to you for a fixed term with payments amortized or spread over the life of the loan. A HELOC is a loan that allows you to draw out money up to the maximum amount of a credit line. You don’t owe the lender anything on the HELOC until you start withdrawing from it, similar to a credit card. Once you do withdraw from the HELOC, you will begin making monthly payments. You can withdraw a lump sum once or withdraw money multiple times until you reach the maximum amount.
Do I have to get my second mortgage from the same place as my first mortgage?
No. The first and second mortgage are totally independent. Use care and research to find the best mortgage provider giving you the rates, terms and service you need. Make sure you provide all the required information from the first mortgage to expedite the process.
Does a second mortgage have any fees?
While fees vary by lender, Discover Home Equity Loans does not have application fees, origination fees, appraisal fees, or cash due at closing. Research different lenders to determine the best combination of rates, fees, and service for you.
Does a second mortgage have any tax benefits?
The interest from your first and second home mortgages may be 100% tax deductible if you itemize your taxes. Consult the IRS or your tax advisor to understand all the details related to tax considerations.