Can You Get a Second Mortgage?

Whether you’ve run into financial woes or you have a goal you wish to meet, exploring your options is a great place to start. For those who are in the process of paying a mortgage, getting a second mortgage is one option to consider. Can you get a second mortgage? What do you need to qualify? And is it the right option for you? We’ll take a look at those answers and more in this guide.

Can You Get a Second Mortgage?

Before we dive into the heavy stuff, let’s clarify what exactly a second mortgage is. A second mortgage is literally a second loan on your home. However, it’s not for the full price of the home but rather for a percentage of the amount you own – your equity.

Let’s break it down into very simple terms. You’ve taken out a mortgage on a $100,000 home and your principal balance is now down to $60,000. This means that you have paid off $40,000 of your home. That $40,000 is your equity – it’s your portion of home ownership at the present time. Keep in mind that while calculating equity, any interest you’ve paid doesn’t factor in, as it doesn’t go to the principal.

Now imagine that you need to get some work done on your home. You don’t have enough money left at the end of the month after paying your mortgage and other bills, so you need another way to fund the work. You can get a personal loan or use a credit card, but you might not get approved for enough with such options.
However, take out a second mortgage against the $40,000 you own in your home. You can use this loan to have the work done on your house – or anything else – as a second mortgage doesn’t have to go to your home.

So the answer to, can you get a second mortgage is yes, as long as you have equity built up to get a loan against. The next question, though, is should you? That depends on your situation, but the following facts can help you decide.

1. It Can Get You a Nice Chunk of Change Quickly

There are plenty of times in life when we can all use a large lump sum of money, and a second mortgage can definitely be beneficial in these times. Secondary mortgage lenders will let you borrow against up to 90 percent of your equity – though some stop at lower percentages. So in our example above with $40,000 in equity, you could borrow up to $36,000. That is a relatively nice outlay of cash, depending on what you need it for.

2. It’s Another Loan

No matter how you look at it, a second mortgage is another bill. If you are already stretched thin in your budget, adding a whole new – and high – loan might be too much.

3. Interest Rates Sit In the Middle of Other Options

Interest on a second mortgage is usually lower than what you would be paying on credit cards, so that is a definite positive. However, that interest can be much higher than other options, like the one we’ll discuss below. This is because, with a second mortgage, the lender is actually taking on some pretty hefty risk.

If you default on your home and your primary mortgage lender repossesses it, the second mortgage lender doesn’t get paid until the primary lender gets all of their money. This could potentially mean your second lender doesn’t recoup all of their money. As such, you pay a higher interest rate.

4. You Can Use the Money for Anything

Your primary mortgage comes with many rules, the biggest being that the money can only go toward a home. Some have very specific wording about the home being your primary residence and what exactly that means.

A second mortgage has no such rules attached. You can use the money on your home, of course. However, unless the lender has their own rules, you can use it for anything. This includes a vacation home – or, you know, just a vacation. You can also use it to pay for a wedding, a vehicle, schooling, to take your kids shopping, to start a business, or anything else your heart desires.

This can be a great thing, but it can also be tempting to get a second mortgage at a whim. Being aware that you have that option might lead to rash decisions, like taking out a second mortgage just to purchase an expensive TV that would require saving for a year. Before you make any such decisions, keep reading so you’ll be fully informed.

5. Your Equity Is the Collateral

Let’s be super clear: a second mortgage means signing over the equity you have in your home. Pretty much everything you have worked for. All the blood, sweat, tears, and long hours you’ve put into paying for your home – is now gone. You are basically starting over, except for the tiny percent that secondary mortgage lenders won’t loan against. Does that mean you shouldn’t do it? Not necessarily. It’s just something that you should consider very carefully, as you could be losing a lot.

6. Requirements Are Usually a Bit Higher

In the most basic sense, a second mortgage has requirements like your primary mortgage. Two of these include needing a good credit score – the specifics of which depend on the lender – and needing to have a specific debt-to-income ratio. Typically, this is below 43 percent.

If they are so similar what makes a second mortgage’s requirements more stringent? The debt-to-income ratio or DTI. In simple terms, DTI is how much you make in comparison to your monthly debt.

When applying for your primary mortgage, your monthly debt will be a bit lower because you don’t yet have the mortgage. However, when you apply for a second mortgage, your monthly debt now includes your primary mortgage payment. Therefore, your DTI will likely be higher, and – depending on your income – you might not meet the requirements.

Are There Any Alternatives to a Second Mortgage?

At this point, you hopefully understand the gravity of the decision you are about to make. And maybe doing so has you wondering whether a second mortgage really is a good idea.

This is a good thing, as you should always think through financial decisions before making them. You should also know that a second mortgage isn’t your only option. Refinancing is another great option. What’s the difference between the two and which is better?

Refinancing as an Alternative

Let’s begin with the first question. While a second mortgage is a second loan, refinancing is actually taking out one brand-new loan.

Basically, either your primary lender or a new lender will open a new loan that will pay off the primary mortgage. This is a great option even if you don’t need extra cash, as you can often get a lower interest rate. Additionally, it can get you lower monthly payments, as your lower balance is spread over the life of the loan.

Going back to our $100,000 home mortgage example above, you could choose to refinance your $60,000 for a lower interest rate and spread that out over a 30-year term. This can save you hundreds each month.

If you do need an outlay of cash, you can choose a cash-out refinance. It’s still one new loan, but it gives you money on the equity you already own. Therefore, you could do a cash-out refinance for the full $100,000.

Like a second mortgage, you would be starting over again with a cash-out refinance. However, you could most likely get a lower interest rate. Additionally, you would only have the one payment to make each month while still getting the cash you need.