What Is a Second Mortgage and How Does It Work?
As a homeowner, you are likely well-acquainted with certain aspects of your mortgage such as the life of the loan, the interest rate, and the payment schedule. You may also be familiar with the concept of equity, which is the difference between what you owe on your home and what it is worth, but perhaps you’re unaware of the second mortgage option.
If you’ve diligently paid down a fair amount of your home loan, and are looking for some extra money to utilize, you may be interested in taking out a second mortgage. While it requires careful budgeting and consideration, a financially savvy homeowner can take advantage of a second mortgage and utilize their equity to consolidate credit card debt, pay for home repairs, or invest in anything else they might need.
Understanding a Second Mortgage
The most basic definition of a second mortgage is that it’s a lien taken out on the portion of your home that you have already paid off. You are basically utilizing the equity in your home as a cash reserve. However, your lender is taking on a majority of the risk in lending a second mortgage, so there will be requirements that need to be met for it to happen:
- Equity. In order to utilize a second mortgage, you will need to have paid off a portion of your primary mortgage. You will be drawing from the positive equity of your home, which is grown by yearly appreciation, paying your loan down, and/or adding value to your home by way of upgrades or renovation.
- Credit. You will likely need a decent credit score to qualify for a second mortgage, although the actual target score can vary by lender.
- Debt-to-income ratio. Note your debt-to-income ratio. Your total monthly debts (mortgages, car loans, credit cards, student loans, etc.) should be less than 50% of your monthly gross income for lenders to entrust you with a second mortgage.
A second mortgage can be quite the boon for those who are on top of their finances but would like a little breathing room for revolving expenses or managing debt. To understand your second mortgage or home financing options, consult with a mortgage professional.
Trust the Professionals at Butler Mortgage
Whether you are in the market for a primary conventional mortgage for a new home purchase or a refinance of your existing mortgage, Butler Mortgage has you covered every step of the way. For over 25 years, we have worked with homeowners in Central Florida to secure home mortgages. Our experienced mortgage professionals have the knowledge and tools to help match you with the best loan solution for you. Let us help you with your mortgage needs by calling 407-931-3800 or by filling out our free consultation form online.