Do you need a large sum of money to renovate your home, pay down high-interest debt, or fund your child’s college education? Owning a home provides a unique opportunity to access funds through a second mortgage. This isn’t your only option, but it could be a money-wise way to tackle big expenses.
What is a Second Mortgage?
A second mortgage is a loan that uses your home as collateral. This differs from a mortgage refinance because it’s an additional loan rather than a replacement for your existing loan. In other words, you’ll have two mortgages on your home instead of just one. The second mortgage is subordinate to the first, meaning that if you default, your existing mortgage will be paid off first.
A second mortgage is useful if you need to borrow a large sum but don’t want to refinance your existing home loan. Refinancing can be a lengthy process with many fees and requires you to change the terms of your current loan. On the other hand, a second mortgage grants access to cash without disrupting your existing home loan.
How Does a Second Mortgage Work?
The process is similar to getting a first mortgage. You apply with a lender who reviews your income and credit history and arranges a home appraisal to verify your property value. Here are some eligibility requirements for taking out a second mortgage:
- You must have a certain amount of equity in your home. This is calculated by subtracting the amount you owe on your first mortgage from the current value of your home.
- Your credit score must be good. A higher credit score increases the chance of being approved for a second mortgage and helps you qualify for a better interest rate.
- You must have a steady income. Lenders want to see that you can afford to make monthly second mortgage payments on top of the first mortgage you already pay.
How to Use a Second Mortgage
Here are some ways to take advantage of a second home mortgage:
- Tap into your home equity to fund a renovation: If you don’t have cash on hand to make much-needed home improvements, a second mortgage can give you the funds you need.
- Avoid mortgage insurance on a second home: If you’re looking to buy a vacation home or invest in a rental property, taking out a second mortgage can help you come up with a 20 percent down payment and avoid paying private mortgage insurance.
- Borrow more than a cash-out refinance would allow: A cash-out refinance is when you take out a new first mortgage for more than you owe on the house and pocket the difference. However, this loan is capped at 80 percent of your home’s value. On the other hand, a second mortgage lets you borrow up to 100 percent of the value in some circumstances.
- Pay down debt: If you have high-interest credit card debt or medical bills, consolidating your payments with a second mortgage can help you save on interest and pay off your debt faster.
- Fund your child’s college education: Tuition is only getting more expensive. A second mortgage helps you pay it without taking on other high-interest debt.
Types of Second Mortgages
The two types of second mortgages include:
- Home equity loans: A home equity loan is a lump sum loan paid back over a set period, usually between five and 30 years. The interest rate is typically fixed, so your payments will remain steady. Home equity loans are a good option if you need a large, upfront sum for a specific purpose, such as paying for a home renovation or sending your child to college.
- Home equity lines of credit: A HELOC is a revolving line of credit you can draw from as needed. The interest rate is usually variable, meaning it may go up or down over time. Home equity lines of credit are a good option if you need funds over an extended period, such as to pay for gradual home improvements or cover ongoing medical expenses.
Alternatives to Taking Out a Second Mortgage
While a home equity loan or HELOC may give you access to the funds you need, it’s wise to consider all your options before making a decision.
- A cash-out refinance allows you to refinance your existing mortgage and take out additional funds. This could be a good option if you want to change the terms of your current mortgage or consolidate debt.
- A personal loan is an unsecured loan you can use for any purpose. While these loans typically have higher interest rates than second mortgages, they do not require collateral.
- A debt consolidation loan is a type of personal loan used to consolidate high-interest debt. It replaces multiple outstanding balances and lowers your interest rate to save you money and help you get out of debt faster.
- A home improvement loan is a type of personal loan for funding home improvement projects. Consider this option if you only need to borrow a small amount.
- An FHA 203(k) rehab mortgage allows you to fund a home purchase and any necessary repairs or improvements. This is ideal if you want to purchase a fixer-upper or renovate your existing home considerably.
- A reverse mortgage allows you to borrow against your home equity without making monthly payments. Instead, the loan is paid back when you sell your home or pass away.
Apply for a Second Mortgage in Oklahoma
At Financial Concepts Mortgage, we’re proud to offer numerous loan options to homeowners in the Oklahoma City area. We are the premier mortgage lender in the region, with over 20 years of experience curating home loan options that meet our clients’ needs. Whether you’re looking to buy your first home, refinance an existing loan, or take out a second mortgage, we can help. To get started, please contact us online or call (405) 722-5626 to speak directly with an experienced loan officer.