Second mortgages are another financing option that allows you to access the home equity you accumulated. If a lender refuses to allow access to accumulated home equity for whatever reason, taking out a second mortgage might be the best solution. Individuals take out second mortgages to finance different expenses, from vehicle purchases to education.
Second mortgages are issued based on your existing home equity. Typically, you can borrow up against up to 80% of your home’s value.
Here’s an example scenario to understand how much money you can take out in a second mortgage.
Suppose you own a home valued at $500,000 with an outstanding first mortgage balance of $300,000. If your lender allows you to borrow up against 80% of your home’s value, in this case this would mean you could get up to $400,000.
The maximum amount you can borrow for your second mortgage equals your allowed borrowing ($400,000) minus the outstanding balance on your first mortgage ($300,000).
Available for Second Mortgage: $400,000 - $300,000 = $100,000.
So, in this scenario, you could secure a second mortgage for $100,000.
Interest rates on second mortgages are higher as the risk the lender takes by issuing you a second mortgage is greater. If you default on your payments or go into foreclosure, the primary lender will be paid first. Typically, the interest rate is anywhere from 2-5% higher on second than on first mortgages.
Second mortgages are paid in monthly installments, just like your first mortgage. Like first mortgages, second mortgages can also come with fixed, variable, or adjustable interest rates.
Not paying on time or defaulting on your loan will negatively reflect on your credit and can result in foreclosure.
Also, taking out a second mortgage means you won’t be able to refinance your first mortgage until you’ve completely paid off your second one.
For these reasons, it’s crucial that you carefully assess your financial situation and ensure that your monthly income is enough to comfortably pay for two monthly mortgage installments. We’ll work with you to find the best possible second mortgage solution from our network of lenders.
