What You Need to Know About a Second Mortgage
A second mortgage is exactly what it sounds like—it’s an additional mortgage loan that is taken out while a first is still being paid. This second loan borrows from the equity of the first purchased home. In most cases, a second mortgage is a home equity loan or a home equity line of credit (HELOC). Over the past few years, home values have surged, growing the equity of homeowners and allowing them more funds to access using a second mortgage.
Who Can Get a Second Mortgage?
The most basic requirement for a second mortgage loan is equity in an initial home purchase. Equity is the amount of ownership a person has in their home. Because second mortgages borrow from a homeowner’s equity, people must have equity in their home in order to borrow from it. Like the first mortgage, a second mortgage requires an accepted application from a lender and closing costs. Homeowners with enough equity, funds, and an acceptable credit score can potentially be approved for a second mortgage.
What Can a Second Mortgage Be Used For?
A second mortgage can be used for just about anything! Most people take out a second mortgage for home improvements, debt consolidation, or large purchases where a significant sum of cash is needed at one time. Depending on the need, the type of second mortgage will vary. A home equity loan is most akin to a first mortgage. This type of loan gives you a lump sum all at once that is repaid in monthly installments with interest. A HELOC is an established line of credit, like a credit card, that borrowers can draw on over a long period of time, paying interest only on the funds they borrow. HELOCs are best when needing smaller sums of money, or unknown amounts, over time.
Advantages & Disadvantages of a Second Mortgage
Advantages
- Allows homeowners to use their own equity to meet their needs
- Can help eliminate or consolidate high-interest debts
- Rates can be lower than some personal loans
- Various loan types are available based on financial needs
- Can be tax deductible in some cases
Disadvantages
- Adds an additional monthly payment responsibility
- Puts your home at risk if payments aren’t made on time
- Requires existing equity, and loans are limited based on the amount of homeownership
- Interest rates are often higher than first mortgages
Where Can I Get a Second Mortgage?
Get in touch with Coastal Custom Mortgage’s team of local mortgage experts to see how we can help make your real estate dreams a reality! We offer a variety of customized mortgage programs at competitive rates.