Owning a home can get expensive. It’s not just the initial cost that most people find weighing heavy on the budget, but the ongoing maintenance to keep the home running in top shape.
Sometimes, the best way to keep your home in good condition is to renovate and improve certain areas of the home. Furniture, cupboards, floors, and walls all take their toll with age, and updating them can add life to your home.
However, this costs money, which is why you’re considering getting a second mortgage. In this article we’ll guide you through what a second mortgage is, the requirements, and the benefits that you, the homeowner, can look forward to.
What Is a Second Mortgage?
A second mortgage is basically taking a second loan on the house, the first being the one that enabled you to buy the house in the first place. It allows you to access the difference between the balance of your original mortgage and the value of your home, called the equity.
So, what does that mean? Say your home is worth about $100,000, and the balance left on your mortgage is $50,000. Your home equity is $50,000, so the 2nd loan would let you have access to that money.
The downside to getting a second mortgage, is that another entity will receive a portion of earnings should you default and the first bank takes possession and sells your home. But if you keep up with your loan payments, you’ll never have to worry about that.
Home Equity Loans
The first type of second mortgage is a home equity loan. This basically gives you the equity left on your house in a lump sum payment. You then repay the money in installments over a set period.
Home Equity Lines of Credit
The other type is a line of credit, which functions much like a credit card. You take money out of the loan as you need it, and continually repay it as you use it.
How Can You Get a Second Mortgage?
You can go to any lender you want to apply for a second mortgage. You can choose to use the same lender that gave you the first mortgage. This can be beneficial if you’ve developed a good relationship with them, they have decent rates, and you just like working with them.
If you don’t want to go with your first lender, or can’t, any bank, credit union, or lending company can provide you with a second mortgage.
If you’re considering applying for a second mortgage on your home, keep in mind there are a few requirements to applying and being approved.
- Loan-to-value ratio (LTV):
- Current home value:
- Income and credit history:
You must first have equity in your home to borrow from it.
When you apply for a second mortgage, the amount you’re requesting should not exceed an LTV of 80%. To figure out what your LTV would be, add the amount you want to borrow to the amount that you owe on the first mortgage, then divide that by the home’s market value. If it’s higher than 80%, you may need to re-evaluate the amount you wish to borrow.
Lenders will want to know the current home value, and some may even require you to get an appraisal during the application process.
You’ll need to show that you not only have enough money to cover your current and incoming debt, but that you have a decent enough credit history.
Getting your second mortgage isn’t going to take as long as getting your first mortgage did. With the first mortgage, you were buying the home. You probably had to wait for the previous owners to leave, appraisals, had a set closing date, etc.
However, depending on how well you meet the requirements, it’s not going to be an overnight process. Expect to be waiting at least a week or more for your application to be approved.
Benefits of Getting a Second Mortgage
The benefit of getting a second mortgage is that you can use the money for just about anything you want. It’s great if you want to make home improvements, as previously mentioned. But some people will also use the equity to pay for college tuition, finance a vehicle, or go on vacation. Others will hold onto the money as an emergency fund.
Knowing your intended use of the funds can help you decide the right type of second mortgage to get.
There’s a lot of thought and details that go into applying for a second mortgage. Whether you’re going for a home equity loan or a home equity line of credit, you need to make sure you meet the minimum requirements if you expect to be approved.
For any questions or if you want to talk to someone about applying for a second mortgage, please give us a call at Fairfax Mortgage Investments and we’ll be happy to set up a meeting with you.