Table Of Content:
- The second Mortgage Frequently Asked Questions
- How much can I borrow for a second mortgage?
- What are the prerequisites?
- What are the terms of a second mortgage, and how long does it take to pay it off?
- What is the distinction between a second mortgage and a home equity loan?
- Do I have to receive my second mortgage from the same lender as I got my first?
- Is there a cost for a second mortgage?
- Is there any tax advantage to getting a second mortgage?
Second mortgages might be an excellent method to utilize the equity in your home to free up cash for pressing needs. Review these second mortgage FAQs and requirements before beginning the application process.
What exactly is a second mortgage?
Is it similar to a home equity loan?
The terms “second mortgage” and “home equity loan” are synonymous. A second mortgage is a loan secured by the home that allows you to borrow money against the equity in your home. Home equity is the difference between the value of a home and the amount still owed on a mortgage. If your house is worth $300,000, but you owe $200,000 on your mortgage, you have $100,000 in home equity. The interest rate, monthly payment, and term of a second mortgage usually are fixed. Lenders will likely encourage you to use it for long-term or substantial needs, such as home improvements, debt consolidation, college fees, and other critical expenses, rather than for day-to-day expenses.
In most cases, the combined limit of your first and second mortgages is 90 percent of the appraised market value of your home. Many lenders employ what is known as a secured loan to value (CLTV) ratio. CLTV is determined by dividing your current mortgage balance(s) plus your desired loan amount by the value of your home:
(Loan Amount + Mortgage Balances) / Home Value = CLTV
Using the previously described example, here’s how to figure out how much you can borrow:
(x + $200,000) / $300,000 =.9 In this situation, x=$70,000, implying that you may be able to borrow $70,000 via a home equity loan. Some lenders, such as Discover, may issue loans with a CTLV of less than 90%, depending on your credit score. Use a home equity loan calculator to calculate your interest rate and monthly payment on your preferred loan amount.
Similar to a first mortgage, you will need to show employment, consistent income, a decent financial history and credit score, a list of your existing bills, and, of course, sufficient equity in your house. Lenders will verify your employment and income information by analyzing your most current W2 forms and, if appropriate, your most recent paycheck stubs spanning the last 30 days. You must produce your most recent federal income tax returns if you are self-employed or earn income from sources other than an employer. Your lender will conduct an appraisal to establish the current market worth of your home. To determine your credit score, your lenders will consult your credit record. All of these factors will influence your qualification and interest rate.