Second Mortgage

What is a second mortgage?

A second mortgage allows you to borrow more money against your home based on your home equity, if you already have an existing mortgage. A second mortgage, just like a first mortgage, allows you to access the equity in your home without having to sell the property to access it. It’s also important to note that your existing mortgage is not affected by getting a second mortgage. In the case of a foreclosure, the primary mortgage lender will be the first to be repaid since the lender will gain ownership of the home by taking the title. A second mortgage can be in the form of a home equity line of credit (HELOC) or a home equity loan and can be a maximum combined loan-to-value of 80%.

Typically a second mortgage will have a higher interest rate compared to a primary mortgage and can be used for things such as:

• Home improvements
• Debt consolidation
• Down payment on another home
• Investments

What are the different types of second mortgages

Below is a chart of the different types of second mortgages you can get:

	HELOC	Home Equity Loan	Private Mortgage
Interest Rate	4.45% @ Prime, or Prime + a given value (Prime +.50% / Prime +1)	3% – 6%	6% and higher
Type of Loan	Revolving	Fixed	Fixed
Minimum Credit Score	650	Varies	No Minimum
Maximum Loan-to-Value (LTV)	80% if its stand alone with no other mortgage	80%	95%
Lenders	Major Banks Credit Unions B-Lenders Private Lenders	Major Banks Credit Unions B-Lenders Private Lenders	Private Lenders

Can I use a HELOC as a second mortgage?

A home equity line of credit is a revolving loan that allows you to borrow up to a pre-approved amount. A HELOC is considered a second mortgage when you get it in addition to a separate mortgage. This means you will need to make payments for your mortgage and for your HELOC monthly or bi-weekly.

If permitted, you can get a HELOC with another bank or lender, as all A-side lenders and some B-Lenders won’t go into 2nd position behind another bank (only very few banks will do this). However, this means that you would need to make payments to two different lenders, which can get confusing for some. You might also be able to look into a readvanceable mortgage where you can combine a HELOC into your existing mortgage. Over time as your home equity increases and you make more payments towards your mortgage, you will be able to borrow more from the HELOC since the credit limit increases as you make readvanceable mortgage payments.

Can I use a home equity loan or private mortgage as a second mortgage?

A home equity loan is a fixed amount of money that you borrow based on your home equity and can have a variable or fixed rate compared to a HELOC which has a variable interest rate that changes with the prime rate.

With a home equity loan and existing mortgage, you can borrow up to a combined 80% of the value of your home. Private mortgages are offered by private lenders and are also home equity loans with less strict lending requirements. Some private lenders may even allow you to borrow up to 95% of your home value or cross collateralize on other properties you own.

What are the main differences between a HELOC and home equity loan?

HELOC:

• Borrow money at any time
• Repay the minimum monthly or pay off in full at any time without penalty – a fully open loan
• Get low interest rates
• Have long term lengths
• Must have a good credit score
• Have a maximum combined LTV of 80%

Home equity loan:

• High interest rates
• Short term lengths
• Can only borrow a one-time lump sum amount
• Must repay on a set schedule
• Bad credit scores are accepted
• Have a maximum combined LTV of 95%

What is the maximum loan size?

The amount you can borrow from a second mortgage will depend on the amount of equity you have in your home. Your loan-to-value ratio (LTV) is a combination of your mortgage size vs your home’s value. With a HELOC, you can borrow up to 65% of the value of your home. With your existing mortgage and a HELOC, you can borrow up to a combined total of 80%. Private lenders will allow you to borrow up to 85% with a private mortgage and some private lenders may even allow you to borrow up to 95%.

How much can I borrow with a HELOC?

With a HELOC, you can borrow up to 80% of your home’s value, if its stand alone in first position with no other mortgage. If you are in the second position, you can borrow up to a maximum of 65%

If your home value is $800,000 and you have an existing $400,000 mortgage the calculation would be:

$800,000 x 80% HELOC limit = $640,000 maximum

$640,000 maximum – $400,000 mortgage = $240,000 HELOC limit

How much can I borrow with a home equity loan from a private lender?

With a home equity loan, you can borrow up to 95% of your home’s value.

If your home value is $800,000 and you have an existing $400,000 mortgage the calculation would be:

$800,000 x 95% home equity limit = $760,000 maximum

$760,000 maximum – $400,000 mortgage = $360,000 home equity loan limit

What are the steps to applying for a second mortgage?

The process for applying for a second mortgage is very similar to applying for your first mortgage.

1. Choosing a lender
   You can choose the same lender you went with for your first mortgage, however it’s best to work with an advisor and take a look at other lenders to see what other deals are out there.


2. Documents
   Similar to your first mortgage, you will need to provide proof of employment and income, credit check and details about your property.


3. Home appraisal
   Your mortgage lender will want a home appraisal to confirm your home’s value since home mortgages are based on your home equity available.


4. Mortgage stress test
   You will need to pass a mortgage stress test when applying for a second mortgage with a HELOC or home equity loan. Private mortgages do not require a stress test.


5. Closing
   Just like your first mortgage, you will need to pay for any closing costs once you are approved for a second mortgage.


6. Accessing your funds
   If you applied for a HELOC, you can access your funds at any time. If you applied for a home equity loan or private second mortgage, you will get the entirety of your funds as one lump sum payment.

Are there any fees associated with a second mortgage?

Yes, just like your first mortgage, there will be fees. Some common second mortgage fees are:

• Administrative Fees
• Legal Fees
• Home Appraisal Fee
• Title Search
• Private Mortgage Lender Fees