A Second Loan Against Your Home
There are a lot of reasons to put a second mortgage on your home.
Maybe you want to put less than 20% down and not pay mortgage insurance.
Or, maybe you want to have cash available to you in the event of emergency such as illness or job less.
Or, maybe you want a second mortgage because you love your first mortgage rate too much to do a cash-out refinance.
For whatever reason you use them, a second mortgage can help you reach your financial goals.
If you’ve never heard of a second mortgage, it’s exactly what it sounds like — a literal second mortgage on your home. A second mortgage is a mortgage lien on your home in addition to your primary mortgage lien (i.e. your first mortgage).
Typically, second mortgages take the form of a home equity line of credit (HELOC) or a home equity loan (HELOAN). They range in size from $10,000 to $500,000 or more.
Most lenders will cap the combined loan-to-value (CLTV) of your mortgages to 90% of your home’s value but in a healthy housing market, you can sometimes borrow with a CLTV of 100% or more.Verify your new rate (Oct 30th, 2020)
What Are Second Mortgage Interest Rates?
Second mortgages are so-called because, in the event of default, the holder of a home’s first mortgage has first claim against monies recovered at auction.
If there’s any money remaining after the first lien holder gets paid, then the holder of the second lien gets paid.
Second mortgages are sometimes called “junior liens” or “subordinate liens” for this reason.
It’s also why their interest rates are higher.
In general, interest rates on a second mortgage will several percentage points higher than for a comparable-sized first mortgage; and second liens can be fixed-rate or adjustable-rate mortgages (ARM).
Second mortgages of the fixed-rate variety are commonly called Home Equity Loans.
Home equity loans are similar to first mortgages in that there is some amount borrowed at the start of the loan, and that amount pays down to zero over time — usually 10 or 15 years.
Interest rates on HELOANs are generally fixed.
The HELOC: A Financial Planning Tool
Second mortgages are also available in a form known as a Home Equity Line of Credit (HELOC).
HELOCs are adjustable-rate mortgages which function more like a credit card than a traditional mortgage.
With a HELOC, homeowner is granted a maximum credit line and a debit card and checks for spending. Whenever a dollar is spent, that amount is added to the credit line’s balance and interest accrues.
HELOCs can be drawn up or paid down at any time and lines with zero balance pay zero interest.
This is one reason why HELOCs are used in financial planning. It can be good to have an extra credit line available in the event of emergency — even if you don’t need it today.
Home equity line of credit mortgage rates are typically based on Prime Rate, which is equal to the Fed Funds Rate plus three percentage points.
HELOCs are cheap today. In 5 years, though, should the Fed raise interest rates, HELOCs could be more costly.Verify your new rate (Oct 30th, 2020)
How Do I Get A Second Mortgage?
Getting a second mortgage may be simpler than you think, and there are three ways to get one.
- When you purchase your home, using your first mortgage lender’s help
- When you refinance your home, using your first mortgage lender’s help
- Any other time, by walking into a bank
When you get a second mortgage as part of your home purchase, your first mortgage lender will handle all of your paperwork and, to you, the work will be transparent save for additional disclosures which will require your signature.
This is similar to how the process works for adding a second mortgage via a home loan refinance.
When you’re refinancing, again, your mortgage lender will handle your second mortgage paperwork and may even make suggestions about the size of your loan.
Homeowners often get discounts on their second mortgage interest rate when their borrow larger amounts from the bank. It can sometimes be sensible, then, to shift a portion of the balance from your first lien to your new second mortgage to exploit this quirk in pricing.
Or, you can just open a second mortgage as a stand-alone.
For a stand-alone second, you can visit almost any retail banker and they’ll get you started and on your way. Closings can happen in as little as a week, but it’s more common to see closings occur within a month.
What Are Today’s Mortgage Rates?
Mortgage rates are low and that includes rates for second mortgages such as home equity lines of credit and home equity loans.
Get today’s live mortgage rates now. Your social security number is not required to get started, and all quotes come with access to your live mortgage credit scores.Verify your new rate (Oct 30th, 2020)