Second mortgages: What they are and how they work

A second mortgage, put simply, is a home loan taken on a property when there is already a mortgage in effect. Like the first mortgage, it is secured by the value of the home. However, this value is the home’s equity, which is the difference between the value of the home minus the amount currently owed on a first mortgage.

There are two primary types of second mortgages: a home equity loan and a home equity line of credit. A home equity loan typically has a fixed interest rate and a defined term. Once the loan closes, the loan amount is fully disbursed to the borrower. Lines of credit work more like a credit card, with a rate that is adjustable usually based on the Prime Rate.

loanDepot offers fixed-rate home equity loans with repayment terms up to 15 years. For more information, speak with a licensed loan officer today.

How much can be borrowed?

The amount of money available to a borrower seeking a second mortgage will depend on several factors. The amount of equity an owner has in their home and the combined loan-to-value ratio are important factors. The borrower’s credit score and income is also used in determining how much can be borrowed, and of course a lender’s specific guidelines. loanDepot home equity maximum loan amounts can be as high as $250,000.

How can the funds be used?

A home equity loan can be used for nearly any purpose, but some of the more common uses include renovating or adding on to a home; refinancing or consolidating high-interest debt; paying for a child’s college education; or accessing a large amount of money for a serious emergency.

What are some advantages of a home equity loan?

In many cases, the interest paid on the loan is tax deductible. Home equity loan interest rates are also usually lower than personal loans or credit cards, and large amounts of money can be borrowed with long-term repayment options. Also, you can use a second mortgage to access equity in your home without affecting a first mortgage that you may have recently refinanced at favorable terms. In some circumstances, home equity loan can even help you avoid paying private mortgage insurance premiums.

What are the typical requirements?

There is a need to prove equity in the home as well as have a solid credit score and the income to repay the loan. While the approval process is generally faster than with a purchase or refinance first mortgage, the same type of paperwork and documentation is required. The guidelines for home equity mortgages are a little more restrictive in general. This is due to the fact that in the event of a default, the first mortgage will always have precedence. Therefore, lenders are cautious. While the process of applying for and obtaining a second mortgage may take some time, the results and benefits are well worth it for many homeowners.

For more information, speak with a loanDepot licensed loan officer.