A second mortgage is a mortgage that is taken out against a property that already has a home loan (mortgage) on it. Generally, people take out second mortgages to satisfy short-term cash or liquidity requirements, have an investment opportunity or to pay off higher-interest debts (such as credit cards and student loans) that a second mortgage might offer.
If you are considering a second mortgage for any reason, here are a few key points to keep in mind:
Second Mortgages and Home Equity:
Your second mortgage and what you can qualify for hinges on the equity that you have built up in your home. Second mortgages typically allow you to access up to a max of 80% of the home value; very few lenders will consider a second mortgage over 80% of the home value.
For example, if you are seeking an 80% Loan-to-Value loan (“LTV”):
House Value $850,000
80% LTV (maximum mortgage amount) $680,000
less: First Mortgage ($550,000)
Amount Available Through Second Mortgage $130,000
Second Mortgages and Interest Rates:
When it comes to a second mortgage, these are typically higher risk loans for lenders. As a result, most second mortgages will have a higher interest rate than a typical home loan. There is also the option of working with alternative and private lenders depending on your situation and financial standing. Keep in mind, typically lenders who offer a second mortgage are private lender MICs (Mortgage Investment Companies) – in addition to some trust companies and credit unions. For major banking institutions, you would need to hold your first mortgage with them in order to be considered for a second mortgage.
Second Mortgage Payments:
One advantage when it comes to a second mortgage is that they have attractive payment factors. For instance, you can opt for interest-only payments, or you can select to pay the interest plus the principal loan amount. Work with your mortgage broker to discuss options and what would work best for your situation.
Second Mortgage Additional Fees:
A second mortgage often comes with additional fees that you should be aware of before going into the transaction. These fees can vary widely but often are a percentage of the mortgage. Other fees to consider include appraisal fees, legal fees to set up the second mortgage and any lender or broker administration fees (particularly with alternative or private lenders).
Second mortgages are a great option for many homeowners and, in some cases, may be a better solution than a refinance or a Home Equity Loan (HELOC).
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