A second mortgage is a type of loan made available to homeowners who already have a first mortgage on their home, which is why it is commonly referred to as a second mortgage. The equity of a home is used as collateral and security for a second mortgage. The loan can be used to consolidate debt, invest in properties or finance expenses such as home renovations, medical bills or even education costs. Second mortgages are ideal to cover large expenses, especially if the first mortgage balance on the home is relatively low compared to the current value of the home. Second mortgages often have lower interest rates than other unsecured types of debt. This is because the loan is secured against the home, which greatly reduces risk for the lender.
What are the Benefits of a Second Mortgage?
Second Mortgages are ideal because they provide easy access for homeowners to get large amounts of cash relatively fast and have the freedom and flexibility to use that cash for any purpose. A big advantage to a Second mortgage is that they are considered safer by lenders in comparison to other types of loans because they are secured by your home and in return have lower interest rates. Although the interest rates are much lower compared to unsecured loans, rates can be higher than that of the first mortgage; this is because a second mortgage does not have priority over the value of the home in the event that the mortgage defaults.
Do I qualify for a Second Mortgage?
The new stress tests that have been introduced do not apply to our borrowers! Even if you have bad credit and no income you can still qualify for a second mortgage as long as there is enough available equity in your home. When determining how much equity is available in your home, lenders are primarily interested in the LTV ratio, which is based on the amount of equity available and the current mortgage balance on your home. To determine the available equity, lenders will consider the following:
Property Value:
From the date you purchased your home, it is likely that it has increased in value. The current value of your property will tell the lender how much equity you have available. The higher the increase in value of your home from the original purchase date, the higher the equity you have will have in your home. In many cases, a lender will require your home to be appraised in order to have an accurate representation of your homes true value.
Total Home Equity:
To determine the amount of total equity available in the home, the lender will consider the current mortgage balance on your home and subtract that from the current appraised value of your home. For example, a mortgage balance of $100,000 on a property that has been appraised at $500,000 would tell the lender that you have $400,000 available in home equity. The more equity you have available in your home the more money you are eligible to borrow.
How much can I borrow on a Second Mortgage?
The amount of money you can borrow is based on the amount of equity you have available in your property. To find out how much equity is available on your home you have to take the total value of your property minus the remaining balance of your mortgage. For example, if a home is appraised at $800,000 and there is a remaining mortgage balance of $300,000, than the amount of equity in the home would be $500,000 ($800,000-$300,000). Once the amount of available equity is clear, lenders will then consider the Loan to Value Ratio (LTV). Using this same example, the lender would divide the current mortgage balance ($300,000) by the total value of the home ($800,000) which would be 0.375. This would then be multiplied by 100 and then subtracted by 100 to determine the current LTV Ratio:
$300,000 / $800,0000
= 0.375 x 100
= 37.5
100 – 37.5 = 62.5%
Because most lenders will not go above 85% LTV, we then must calculate how much equity in the home is eligible for a loan. To do this the lender will subtract the Current LTV ratio from the 85% cut off. Using the above example 85% x $800,000 = $680,000, if the existing mortgage remaining on the home is $300,000 and you are looking for $50,000 as an equity loan, the lender calculated loan to value by Adding the W$300,000 and the $50,000 request for a total of $350,000 which is the total LOAN, divided by the $800.000 VALUE = 43.75%. To calculate the maximum loan simply multiply the value $800,000 by the maximum LTV of 85% = $680,000, then subtract the existing mortgage of $300,000 for a total available Equity loan of $380,000.
What kind of rates can I expect?
Interest rates start at 6.99%. When it comes to a second mortgage, you can almost always expect the interest rates to be higher than the first mortgage. The reason for this is because the first mortgage has 1st priority on the assets of your collateral in the event that default occurs on the loan, placing the lender of the second mortgage at higher risk than the lender of the first mortgage. Credit history is also taken into account when determining the interest rate for the second mortgage. If you have bad credit you can still qualify for a loan, although the interest rate may be higher as bad credit increases risk for the lender. In the above example the $380,000 loan would be available at an average rate of 7.99% due to the scale of the funds required. We have a variety of flexible soutions available so dont hesitate to contact us for your quote.