When you need extra money for a major home improvement, debt consolidation or significant expense, you may want to consider a second mortgage on your home. This allows you to free up cash by borrowing against your home’s equity. However, just as your house is collateral for your first mortgage, your house is again collateral for the second home mortgage. This adds to your financial exposure or risk of foreclosure on your home if you find that you are not able to make payments. Once you understand both the risks and the benefits of the second mortgage process and decide that it is beneficial for you, follow these steps explaining how to get a second mortgage.
Know your financial situation
The Consumer Financial Protection Bureau recommends that “your total monthly home payment should be at or below 28% of your total monthly income before taxes.” Be sure to include your primary mortgage, second mortgages, real estate taxes, homeowners insurance and any mandatory fees in calculating total monthly home payment.
Incorporate your new, calculated monthly home payment into an overall budget to be sure you have confidence in your ability to make payments if you do take on a second mortgage. Your homework will help demonstrate to potential lenders that you meet their financial requirements for loan qualification.
Before you contact any second mortgage lenders, pull together the information they will need for their decision on approving a loan. For your personal information you will need employment history, financial history and identification of all outstanding debt. Have a general idea of your credit score to ensure that you qualify and to get a general rate estimate through the use of online calculators. Potential lenders will view this information as well.
Find out what your home is worth. Use Zillow or Trulia for an estimate so you can estimate your level of equity in the home. This will help you calculate the maximum second mortgage size you might be allowed. Your mortgage lender is likely to request a home appraisal to verify the current market value of the home.
What is a second mortgage? Understand your choices
Second home mortgages can be home equity loans or home equity lines of credit (HELOCs).
A home equity loan is similar to a first mortgage and is usually provided with a fixed rate. It is a fixed amount for a fixed term, sometimes up to 30 years (as is the case with Discover). You will receive a lump sum and begin to make monthly payments of interest and principal spread evenly over the loan term.
The HELOC is an open-ended loan that is similar to revolving credit. You will be approved for a maximum loan amount and can withdraw the money when you want it, in small or large amounts over time to the maximum credit limit. You’ll be required to make payments only after you take the first withdrawal. You’ll have the choices of fixed or adjustable rates. Be sure you understand how adjustable rates work before you commit to this type of loan. If your monthly payment goes up and you’re not able to meet the commitment, you could lose your home.
Learn more about the differences between home equity loans and HELOCs here.
Find a second mortgage lender
You may want to start discussion with the organization that holds your first mortgage, but it is generally helpful to get several estimates. Ask for written Loan Estimates, compare Annual Percentage Rates (APR) and compare fees. Use online calculators to learn how much you may be able to borrower and what your potential rate and monthly payment may be. Be sure to work with reputable lenders who have good service records. There’s no harm in reaching out to different lenders to see what they can offer. Do your homework and good luck!