Home Equity/Second Mortgage

Home Equity/Second Mortgage

If you own a home, you might be wondering what is the difference between first and second mortgages. In short, a first mortgage is the primary loan that you take out to purchase a home. You go to a lender, take out a loan (mortgage) to pay for the home. Your property is the collateral in this scenario. You must repay the loan (mortgage) in monthly installments over an agreed upon term (10, 15, 20, or 30 years). As you make your scheduled monthly payments, you gain equity in your home. (The difference between your home’s current market value and any remaining mortgage payments is called home equity.)

A second mortgage is a separate loan that you take out (in addition to your first mortgage). You can borrow on the equity in your home up to certain percentage, usually 80% of the value of your home, including your first mortgage balance.  (Example: Your home is worth $100,000 and you owe $60,000 on your first mortgage.  You could borrow up to $20,000 on a second mortgage ($100,000 x 80% = $80,000 – $60,000 = $20,000.) Second mortgages are usually used to finance home improvements or to cover other costs associated with buying a home.

Some people use a HELOC as a second mortgage. Learn more about that here.

If you were unable to make payments and the mortgage were to default, the first mortgage would receive all liquidation proceeds. The second mortgage would only receive payments once the first mortgage were paid off.

The Pros and Cons of a Second Mortgage:

Pros:

• An option for a lower interest debt than with credit cards or personal loans. Interest rates are usually higher than with a first mortgage, but are usually lower than a personal bank loan or credit card.
• It is a debt that can be paid off over a longer period of time (15 years at MMCCU).
• You can use it for any purchase deemed necessary: to purchase a second home, consolidate debt, purchase a vehicle, etc…

Cons:

• It can be expensive to take out a Second Mortgage. There are also additional fees involved (just like with a first mortgage), including appraisal fees, credit check costs, and origination fees
• Second mortgages are often riskier because the primary mortgage has priority and is paid first in the event of default. If the loan were to default, you could end up owing money if your property value doesn’t cover the deficit of both mortgages.

Requirements to get a second mortgage usually include:

• A credit score of at least 620
• A debt-to-income ratio of 43%
• A decent amount of equity in your home

Contact our friendly team to learn if you qualify.