Home sales have increased in the past year in Tennessee, especially in the Nashville area, with the total sales for 2020 going up 6%. Whether they were new homebuyers, those looking to make a change, or people looking for a second home, people took advantage of record low-interest rates.
If you’ve been in the market to purchase a new home, you might have seen the term “Second Mortgage” multiple times. Many people believe that they have to be in financial distress to take out a second mortgage on their current home. That’s not necessarily the case.
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This guide will go over everything you need to know about second mortgages and how you can apply for one with a mortgage lender. We’ll also talk about different scenarios where it would make sense to take out a second mortgage.
What is a Second Mortgage?
With a second mortgage, you borrow from your current home’s equity in the form of a line of credit or a loan. Equity refers to the difference between the remaining balance on your home’s mortgage and your home’s value. The new mortgage is considered a second one because your property already has a first mortgage established.
You can use your second mortgage loan funds to purchase an additional property in the Nashville area. If you’re not interested in purchasing a new home, you can use the money from the second mortgage for different purposes.
Use your second mortgage to:
- Renovate your home
- Pay off student loans
- Consolidate credit card debt
Typically, the interest rates for second mortgages are lower than those for credit cards. This makes them a great option for paying off that type of debt.
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How Does My Home Equity Work with a Second Mortgage?
Your home equity plays an essential role in the second mortgage process. It determines how much money you’ll be able to get.
Unless your first mortgage has a $0 balance, your home still has a lien. The lender for your first mortgage can take your home back if you default before paying off the first loan. As you make payments on your principal loan balance, the loan that you’ve paid off is referred to as equity.
There’s an easy way you can calculate your home equity. Take the amount you’ve paid toward your home’s principal amount and subtract it from the total amount you’ve borrowed.
For example, if your home is worth $200,000 and you’ve paid off around $60,000, including your down payment, you have $60,000 worth of home equity. The amount you pay in interest doesn’t count toward your equity.
There are ways your home equity can increase. If you’ve made improvements in your home or are currently in a strong real estate market, your home’s value will increase. Your home equity will increase without you having to make extra payments.
However, there is a flip side to that. If the value of your home decreases or you’re in a buyer’s market, you might lose equity. Talking with a qualified mortgage lender will help you determine the value of your home.
What’s the Second Mortgage Process?
Your home’s equity is valuable but not something you can readily access, like liquid assets. With a second mortgage, you can tap into your home’s equity. Instead of leaving the money tied up in your Nashville property, you can use it for your current expenses.
Each lender has specific requirements to get approved for a second mortgage. The basic requirement across the board is needed to have equity built up in your property.
Lenders usually allow borrowers only to take out a portion of their home’s equity. It depends upon your remaining mortgage balance and your home’s value. After taking out a second mortgage, you should still have around 20% equity left in your home.
You’ll also need a credit score of around 620. Some individual mortgage lenders might have higher requirements. Your debt-to-income ratio should be lower than 43%.
What’s the Difference Between Refinancing and a Second Mortgage?
When you have a second mortgage, you’re adding a new mortgage payment to your list of monthly debts. You still need to make payments on your original mortgage in addition to your second one.
When you refinance your home, you replace your original home loan with your mortgage lender’s new set of terms. You make one payment a month.
If your house is foreclosed on, the lender for your second mortgage will only get paid after the lender for your first mortgage does. As a result, you might have to pay higher interest rates with a second mortgage than you would with a refinance.
Some homeowners go with a cash-out refinance instead of a second mortgage. With that option, they can receive a lump sum from their lender in exchange for a higher principle on their first mortgage.
Pros and Cons of a Second Mortgage
You can borrow more money with a second mortgage than you could with other types of home loans. Like we mentioned before, second mortgages typically have lower interest rates than most credit cards. This is because they’re considered secured debt since they have collateral behind them.
There are also no limits on how you can use the funds from a second mortgage. Use the money to pay for your wedding or add on a master suite to your Nashville area home.
While they have lower interest rates than credit cards, second mortgages have higher interest rates than home refinances. That’s because the lender for your second mortgage doesn’t have as much interest in your property and your first lender does.
A second mortgage might put additional pressure on your monthly budget. This is because you’re making two mortgage payments each month. Plan out your monthly budget to ensure you can take on the financial strain.
Contact Compass Mortgage to Apply for a Second Mortgage in Nashville
Figuring the ins and outs of a second mortgage can be complicated. Whether you need extra funds to pay off debts or want to invest in renovations for your Nashville home, tap into your home equity. You can do a lot with your second mortgage
Compass Mortgage is an experienced mortgage company that assists home buyers in Tennessee, Illinois, Iowa, Wisconsin, Minnesota, and Florida.
Contact us today to learn more about your options.