A mortgage is a secured loan that allows you to borrow money in exchange for putting your home up as collateral. If you have an existing mortgage, you may still borrow more money against your home with a second mortgage. A second mortgage can be in the form of a home equity line of credit (HELOC) or an additional mortgage (home equity loan).
Loans secured against your home will have a priority in which they will be repaid if you default on your loans. If you default and foreclosure occurs, the loan that is first in line will be repaid in full before any other loans secured against your home. The remaining amounts after the first loan have been paid off will go to the second mortgage, and so on.
For example, if your home’s value is $500,000 and you have a first mortgage balance of $300,000 and a second mortgage of $100,000, both of your mortgage lenders will be able to be repaid in full. If your home’s value is only $350,000, your first mortgage will be repaid in full while your second mortgage lender will only be able to recover $50,000.
A second mortgage will have higher interest rates than primary mortgages, but it doesn’t mean that second mortgage rates are extraordinarily high. HELOC rates might only be slightly higher than primary mortgage rates, however second mortgages offered by private lenders can have much higher rates.
A HELOC as a second mortgage is often offered by a major bank, while a mortgage as a second mortgage is offered by some B-lenders and private lenders.
The amount that you can borrow from a second mortgage will depend on the amount of home equity that you own. Your combined mortgage size versus your home’s value is called your loan-to-value ratio (LTV).
You can borrow up to 65% of your home’s value with a HELOC, or up to a combined total of 80% with an existing mortgage. For example, if your existing mortgage is currently 30% of your home’s value, you can get a HELOC as a second mortgage for up to 50% of your home’s value.
Getting another mortgage in second position with a private lender is usually for up to 85% of your home’s value, however, some private lenders allow you to borrow up to 90% or even 95% of your home’s value.
For example, if your home’s value is $500,000 and you currently have an existing mortgage for $200,000, you can borrow up to another $200,000 with a HELOC or $250,000 with a home equity loan through a private mortgage lender.
A HELOC is a revolving line of credit, which means that you can freely borrow at any time up to your credit limit. This allows you to only pay interest for what you actually need to borrow.
A mortgage in second position will give you a one-time lump-sum of cash. This is a less flexible option, as it means that you will need to pay interest on the entire mortgage amount, whether or not you actually needed the entire amount.
Major banks require you to have a good credit score in order to qualify for a HELOC. Having a credit score of less than 650 can make it difficult to get a HELOC.
Private mortgage lenders accept those with bad credit scores , making it easier to get a second mortgage.
Mortgages from private lenders have short terms, ranging from a few months to a few years. At the end of the term, you will either need to pay back the entire amount of the second mortgage, refinance , or renew the second mortgage.
A HELOC has a much longer term period, during which you can freely borrow, and you may also be able to extend your term.
HELOC rates are much lower than private mortgage rates. HELOCs have variable rates, while second mortgages can have either fixed or variable rates. To check current second mortgage rates, visit our HELOC rates and private mortgage rates pages.
A second mortgage is a way for homeowners to borrow money using their equity in their home. The money that homeowners borrow from a second mortgage can be used for paying off high-interest debt, such as credit cards. It can also be used for debt consolidation, home renovations, home improvements, tuition, medical expenses, or investments.
When applying for a second mortgage, you will have to pay fees such as an appraisal fee, title service fees, and legal fees. Some private mortgage lenders may also charge additional lending fees.