How to Get a Second Mortgage

Borrowers who want to get a second mortgage on their house may have to do a little more work than they would like. Recent changes to mortgage law and new government regulations require a process perhaps more detailed now than at any point in history. However, we can still show you how to get a second mortgage with success, and we’ll do just that.

Second Mortgages
Second mortgages can be taken out in a number of ways. Some banks offer second mortgages for a portion of the home equity which operate like other installment debt. Others will offer second mortgages where the borrower can access a credit line against their home equity at any time. There are pros and cons to each:

Installment second mortgage – An installment debt second mortgage will allow you to borrow more than a home equity line of credit, and at a fixed annual rate. However, borrowers should be sure that they can make the most of their second mortgage and still make payments on time, as payment terms are not flexible. An amortizing loan, installment based second mortgages will have a fixed monthly payment for a predetermined period of time. In general, expect a loan for 10 to 15 years.

Line of credit – A second mortgage line of credit is a great way to make available a loan at any time you need one. With a home equity line of credit you can pay as much or as little as you want each month, and even borrow more or less at any time. Some HELOCs, as they are known, also come with checkbooks, so that you can use your line of credit to buy or pay for other higher interest debts. A line of credit, however, does come with some risk, particularly in the rate of interest, which is almost always a variable rate.

Steps to a Second Mortgage
Applying for a second mortgage is easy—you need only ask a bank to give you the paperwork to do it. However, after several years of declining real estate values, bankers are far less lenient about who they approve for a second mortgage against a home. Here are a few steps to get a second mortgage:

1. Apply – Easy, simple, and quick, applying is the first and most important step.

2. Evaluate your home equity – Your home equity is the amount of value of your house above any debts owed on it. Thus, if you own a $100,000 home with a $50,000 mortgage, you have $50,000 in home equity.

3. Find the LTV – LTV, or loan to value, is the amount a bank will lend you against the value of your home. Using the same example above, a homeowner who owns a $100,000 home with $50,000 in equity won’t be able to borrow a full $50,000. Instead, the mortgage company will assess the LTV, often 80% of the home. Thus, if the LTV is 80%, then the bank will allow up to $80,000 in loans against the property. Seeing as there is a $50,000 mortgage already, then the bank will loan to the borrower the difference, or $30,000.

4. Inspections – Homes are inspected and analyzed by a licensed professional before a second mortgage can be written against a home. In most cases, an inspector will seek to find a good market value of the home, which may be more or less than you paid. Banks are often eager to make loans, and appraisers have been known to mark up the price of the home if it means they can lend you more money. In markets where real estate is falling fast, however, expect a very low valuation.

5. Tending to credit – A loan is issued based on the value of your home, but also your likeliness to repay the debt. Before accepting any loan, you should be sure to pay down existing debts, reduce credit card balances, and try to go into the bank without a significant amount of unsecured (credit card and personal debts) before applying for a second mortgage. Showing responsibility with open credit lines is a great way to get a lower interest rate, which will save you thousands of dollars over the life of the loan.