When it comes to mortgages, second ones always seem to have a bad reputation. As if financially, nothing good can off a second mortgage, and without getting into the nitty-gritty of it, you might think that’s true. However, it’s not correct at all and this blog post is here to make you understand why applying for a second mortgage has its benefits. Not only can it help you in purchasing an extra property to invest in, but it can also help you secure emergency funds, boost your credit score and much more. So read till the end of this blog post to have a complete and clear idea of how second mortgages work.

Explaining second mortgages

Let us take a look at the concept of a second mortgage. With a second mortgage, you have the option to tap into the equity of your home and secure funds against your property. What happens here is, when you purchase a property, you will be getting a primary mortgage on it and as you pay it off your equity percentage for your property would increase. Now, when you use this equity to take out a loan against your property, that is called a second mortgage (it is a secondary loan on top of your first or primary mortgage. Another reason why it’s called a second mortgage is that the primary mortgage takes precedence in the event of a foreclosure.

Different types of Second mortgages

One of the major pros of a second mortgage is, it is a package of several types of options, which makes this scheme very flexible. The options that are available are:

  • Home equity loan: This is a traditional second mortgage and allows you to borrow a lump sum amount in funds against the equity of your property.
  • HELOC: HELOC or Home Equity Line of Credit can sometimes be classified under the second mortgage category and it allows you to draw credit whenever needed.
  • Piggyback mortgage: This type of second mortgage can be split into two types of loans.

With all these options available for the taking, if you know a bit about this type of loan then it can become very handy when you need rapid financial support. For example, in the scenario of a crisis, paying back a high-rate consumer debt, paying for your child’s education or even for home upgrades.

Is it hard to qualify for a second mortgage?

Not at all, qualifying for a second mortgage is relatively easier than qualifying for a bank loan. Generally what lenders consider is:

  • Equity for your property: You will need to share your primary mortgage details so your mortgage lender can understand how much equity you have in your property
  • Verifying your income: If you have a steady source of income, getting a second mortgage shouldn’t be a hassle for you, keep your letter of employment as well as your recent pay stubs as proof
  • Credit score: The higher the credit score the lower interest rates you would get for your second mortgage. (Look forward to keeping a minimum score of 620)
  • Property value: Consider getting your property appraised by a professional valuer, this can help with your loan approval. Your lender will verify your property’s worth first and then continue with the application.

Some lenders consider a second mortgage as a risky investment, however, if you can prove that you can make timely payments to repay them, then your loan application would be approved in no time.

The turnaround time

There is some good news for you in this section of the post. If you think that you will have to go through the whole ordeal from your first mortgage, then you’re wrong. The application process is smooth, with some lenders committing that you would get your funds within days of applying. However, you can expect the fund’s transferred to your account within a month’s time.

 Maximum loan size

With a second mortgage, you will have the option to rack up to 65%  of your property’s market value with a HELOC and it can go up to a combined percentage of 80% with your existing mortgage. If you have a private mortgage then you can borrow up to 85% and some lenders can extend that limit to 95%. The endpoint is, the amount that you can borrow from this type of loan will depend on the amount of home equity that you own.

Some reasons why should you apply for a second mortgage

  • If you’re planning to start a business or expand an existing one then tapping into your home equity is one of the best options that you could have for a source of funds for working capital. It doesn’t exclusively your own business, you can use the funds to invest in another business as well.
  • When you apply for a second mortgage, you will have the option to consolidate all your debts under one account, and then you can pay all of them at the same time with one monthly transaction at a lower interest rate. By doing this you can save a lot on your monthly expenses.
  • Another significant advantage of second mortgagees is that they can be obtained even with a low credit score and when you repay the loan, it will in turn boost that score again. Over a credit card, second mortgages come with a lower interest rate.
  • With a second mortgage over a first mortgage, you can avoid applying for private mortgage insurance (PMI). If you can’t secure a 20% downpayment on your property, then it’s a mandate you have to apply for a PMI. However, if you’re applying for a second mortgage, you won’t have to.

Your second mortgage is an effective financial tool

And you should use it for your benefit. It offers you the opportunity to use the equity in your home for several situations. If you want to consolidate several high-interest debts, invest in a business, need emergency funds- a second mortgage can help you with all these matters and improve your financial situation. We hope that this article has cleared up some facts on this topic for you. If you need more details, always consult a professional mortgage broker. Starting from advising you with the available options to the paperwork, they can help you with everything.