A second mortgage, which is sometimes called a junior lien, can be an option for turning your equity into available funds without having to sell the home. A second mortgage will increase your debt amount. It is considered a second mortgage because if the home should fall into foreclosure it will be second in line to be paid off after the first original mortgage on the home.
How a Second Mortgage Works
Borrowing a second mortgage means you now have an additional loan to pay on your home. It is secured by your home equity, and in most cases, homeowners have not yet paid of the first mortgage on the property.
To qualify for a second mortgage a homeowner needs to have a significant amount of equity in the property. To find out your current amount of equity you can subtract your current mortgage balance from the home’s current fair market value. The second mortgage will give you the opportunity to turn a portion of that equity amount into tangible cash you can use right now without selling your home to do so.
A second mortgage is different from a refinance in that it does not change the terms of your first mortgage at all. It is entirely separate from the primary loan on the home. You will be making two loan payments at the same time. Second mortgages tend to come with higher interest rates because of the risk of not being paid off in full should the home go into foreclosure, because they are second in line behind the first mortgage. These rates are still lower than a personal loan are credit card, however.
Types of Second Mortgages
Piggyback Loan: this is a second mortgage taken out at the same time as a first mortgage. It is also called an 80-10-10 loan. This keeps homeowners from paying mortgage insurance by putting the home on a second mortgage for 10% of the purchase price while the primary loan finances 80%. The other 10% would come from a down payment.
Home Equity Loan: This is a second mortgage that gives the homeowner a lump sum of money which is repaid with a fixed rate of interest over a set amount of time.
Home Equity Line of Credit: this is a second mortgage with an adjustable-rate that is open-ended and more like a bank account where you make withdrawals as needed and then repay over time.
Qualifying Terms of Second Mortgages
The requirements of a second mortgage are different depending upon the lender and the type of loan. There is one qualification requirement stand-alone second loans (anything other than Piggyback loans) have and that is having a sufficient amount of equity. The amount you can borrow is up to 85% of your current equity.
Other requirements of typical second mortgages include a credit score of 620 or higher. Some lenders may require a higher score especially if borrowing a large amount of money. Higher credit scores also help to secure lower interest rates. Lenders will also be looking for a debt-to-income ratio lower than 43%.
In most cases, a lender is going to want an appraisal on the home to determine its actual value. This will decide how much a bank will loan to you.
For more information on second loans and all of your mortgage options in Mission Viejo and California please contact me anytime.
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