What is a second mortgage?
When you have a current mortgage on your house, you take out another one known as a second mortgage or a subordinate mortgage. A second mortgage has a lower priority than your primary mortgage.
There are a few different options to choose from when considering a second mortgage. It would help if you choose the option that best satisfies your financial needs.
Types of second mortgages
One of the most common examples of a second mortgage is a Home Equity Lines of Credit or HELOC. HELOCs give homeowners the chance to borrow money based on the equity they have in their homes.
Another second mortgage option is a piggyback loan, while the third option is a home equity loan. While Home Equity Lines of Credits and home equity loans sound similar, they differ because of how the money is disbursed.
When you get a HELOC, your lender will allow you to withdraw funds during a specific time. This process closely resembles how you would use a credit card. During the period where you can withdraw funds, you will begin to make payments based on how much credit you have used.
Another option for a second mortgage is a piggyback loan. This allows homebuyers to purchase a home if they have a down payment that is less than 20%, and they don't have to pay for private mortgage insurance.
The breakdown of the second mortgage works by the first mortgage being funded at 80% of the home purchase. The homebuyers fund 10%, and the second mortgage funds the remaining 10%.
The last type of second mortgage available is home equity loans. This option allows borrowers to get a loan based on the amount of equity in their homes. Depending on the lender you choose, you will have a fixed interest rate on a home equity loan. As you make your repayments, the interest will be included as you pay down the balance.
When taking out a home equity loan, the payment schedule will begin and end at a specific time. Most second mortgages are taken out once you buy your home.
If you were to default on a second mortgage and sell your home, those loans would get paid from the proceeds of the sale. This only happens once your primary mortgage is paid off first. Second mortgages also tend to have higher interest rates because it only receives repayments when the first mortgage is paid off.
Also, the amount borrowed for a second mortgage tends to be much lower than the first mortgage. Yet, the most significant benefit of a second mortgage is you are able to use the money for anything.
How do you obtain a second mortgage?
The process for obtaining a second mortgage will be like getting a primary one. You are going to want to make sure your credit score is a minimum of 620. It is also essential to know that you may need to have a higher score depending on the lender you choose.
Higher credit scores will also translate to better second mortgage rates. When applying for a second mortgage, a good rule of thumb is to have your debt-to-income ratio below 43%.
The most significant difference in obtaining a second mortgage will be leveraging the equity that you have in your home. It is a fixed amount that you can borrow and repay throughout the loan.
Can you refinance a second mortgage?
Now that you know how a second mortgage works, if you have one and are looking to refinance, this can be done. To refinance, you have to have 20% of the equity in your home.
Refinancing a second mortgage can have stricter requirements because the lender is assuming more risk if you default. When looking to refinance your second mortgage, it is a good idea to have excellent credit and good on-time payment history.
You can also look to refinance your first and second mortgages at the same time. Depending on the lender, they can offer to combine the two mortgages. Approval with this process will be contingent on the equity in your home and the age of your second mortgage. Refinancing your home this way can help reduce your payments.
It is important to note that when refinancing a second mortgage, you don't have to refinance your primary mortgage at the same time. You want to make sure to speak with a lending specialist to find suitable options based on your needs.
Benefits of refinancing a second mortgage
There are many benefits to refinancing your second mortgage. For starters, if you are taking out a second mortgage and perform the right upgrades, this could increase the overall value of your home.
Another benefit to refinancing a second mortgage is it helps avoid taking out a personal loan. Going through this process will provide more cash flow; if you use the money to improve your home, the interest is tax-deductible.
Refinancing your second mortgage will allow you to pay off debt such as medical payments and credit cards. Since credit cards typically have a higher interest rate, using the funds from your refinance to pay off your balances can help you save thousands over time.
Other benefits to refinancing a second mortgage come in the form of interest rates. If interest rates are lower, it could provide some savings. For instance, if you have a second mortgage for $50,000 at 5% and it is on a 15-year term, your payment would be around $425.
Yet, if you refinanced your home at a 3% interest rate, your monthly payment could drop anywhere from $80 to $150. As with anything, there are fees that are associated with refinancing, so you want to make sure you are aware of what those are.
If your credit score has improved, refinancing your second mortgage is also a good option because it can mean lower interest rates. This can translate into lower monthly payments.
Drawbacks of refinancing a second mortgage
The drawbacks of a second mortgage refinancing are minimal. The most significant disadvantage is the possibility of foreclosures or defaulting on your loan. Also, as mentioned previously, with refinancing a second mortgage, the interest rates tend to be higher.
Other considerations for refinancing your second mortgage
As you consider refinancing the second mortgage, you want to make sure it is a good time to do so. Rates tend to vary, and in many cases, lenders charge a refinance fee that can be anywhere from 3% to 5% on the total mortgage. If you don't have much savings or the cash on hand that you would earn with a lower interest rate, it may not be the best time to refinance.
You also want to determine what the qualifications are when considering a second mortgage refinance. Lenders take a look at property value, and if your loan to buy is not within the lender's preferences, you may not qualify for a refinance.
One other consideration is your current finances. Your credit score and debt-to-income ratio will play a significant role in refinancing your second mortgage. The process can involve a considerable amount of documentation related to your income and debt, so be prepared by having this easily accessible.
Are you looking to refinance your second mortgage?
If you are wondering if you can refinance a second mortgage, the answer is yes! It can be a great way to access extra cash, make home improvements, or pay down debt.
Remember, before you start this process, it is good to make sure your credit score is at or above the limit the lender will require. You want to have a financial purpose that will benefit you in the long term before considering your second mortgage refinance option.
Lastly, you want to work with a reputable lender to answer your questions and help make the process fast and straightforward. If you don't think refinancing is right for you, it might be a good time to sell your home. Submit your address today and let us get you a no-obligation cash offer!
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To determine how much you must pay for the buyout, you will add your ex-spouse's equity and the amount left on the mortgage together. With the example above, the buyout that you would have to pay your ex would be $350,000 before you can take over complete ownership of the house.