One of the most common questions we hear is, “What is a second mortgage?” Inherently, the next question to follow typically is, “How can it benefit me?” There are several key points to dig into when exploring a second mortgage, such as the types of second mortgage loans available and what you’ll need to apply successfully.
What is a second mortgage?
Also known as a “junior lien,” a second mortgage is a type of subordinate mortgage a borrower can take out while paying off their original mortgage. The amount you’re allowed to borrow is typically limited to 85 percent of your home’s equity. Often, second mortgages are used to pay off debt, make home improvements or jump on investment opportunities. Because second mortgages are liens secured by your home, failure to pay back your second mortgage could result in a lender taking your home to satisfy the debts owed.
Types of Second Mortgages
Home Equity Loan
A home equity loan allows you to tap into your home’s equity and receive a lump sum of money to use and pay back at a fixed rate through amortization over the course of five to 20+ years, depending on the lender.
Home Equity Line of Credit (HELOC)
A HELOC is a revolving line of home equity credit or an amount of money you can withdraw as needed. You only pay back what you use – plus interest. Like a credit card, a HELOC gives you a set limit of borrowing potential. You can borrow up to that limit, pay it down then continue to borrow.
How can a second mortgage benefit you?
Pay off Debt or Make Large Purchases at Lower Interest Rates
Given the current mortgage rates trend, homeowners looking to save more on big purchases or home improvements will often find home mortgage interest rates a more affordable option than high-interest credit cards or personal loans. Plus, you can use your second mortgage funds for virtually anything you want.
Alternative to Cash-Out Refinance
A home equity credit loan is an alternative to a cash-out refinance. Much like a cash-out refinance, a home equity credit loan allows you to borrow a lump sum of money to pay back at a fixed rate. Instead of rewriting your original mortgage loan like in a cash-out refinance, you’ll make payments to your second mortgage separately.
Some instances – like home improvements – allow you to write off your second mortgage interest payments at tax time. We recommend reading through specific requirements for mortgage tax deductions to ensure your situation qualifies for such deductions.
Second Mortgage Requirements
To qualify for a second mortgage, you must have equity in your home. You’ll need at least 15 to 20 percent equity in your home to even be considered for a second mortgage. Then, lenders will look at your credit score (at least a 620), your debt-to-income (DTI) ratio (no more than 43 percent of your home equity loan), your other debts and your history of debts owed. Generally, you’ll get a better interest rate when your credit score is higher, your DTI ratio is lower, and your credit/payment history shows a healthy rapport.
Wyndham Capital Mortgage is the FinTech mortgage lender that saves you time and money, making the home lending process quick and easy. Whether you need robust tools like mortgage estimators or have more questions about which second mortgage option is best suited for you, our mortgage loan officers are ready to help. Contact us to find out more about our loan offerings and our digital advantage.