Cashay logo

Empowering your money

Debts and down payments can often be handled with a second mortgage

Debts and down payments can often be handled with a second mortgage. Here we break down the ‘why’ and ‘how’ of the process of getting a second mortgage.

Video Transcript

[MUSIC PLAYING]

- As a homeowner, you might find yourself needing a lot of cash. But you don't want to swipe your credit card. This is where a second mortgage may come in handy. A second mortgage is a financing technique that's become an increasingly common option for homeowners. Second mortgages are usually in the range of 10% to 20% of the home's appraised value and generally paid out in a lump sum.

So why take out a second mortgage? If you don't have a down payment that equals 20% of the value of the home you want to purchase, getting a second mortgage can fill this financial shortfall. You can also take out a second mortgage to access the equity in your house. Since debt in the form of primary, secondary, and home equity lines of credit is generally tax-deductible, many consumers prefer to consolidate other debt they have by borrowing against their home and paying off the other outstanding debt.

But there are downsides. Like if you lose your job or encounter another financial difficulty and can't make your payments, you could lose your home. You're also reducing the amount of equity in your home, which many people count on to help them in retirement. When determining whether you are qualified for a second mortgage, lenders examine a number of criteria, including your credit score, debt-to-income ratio, employment history, and current home equity.

Be prepared to pay a higher interest rate on your second mortgage than your first, because second mortgages are subordinate to first mortgages. Lending institutions consider them riskier. Most second mortgages carry points whereby you can buy your interest rate down to a lower level by paying an upfront fee. Other fees you are likely to encounter include appraisal fees, application costs, and closing costs, stay financially fit, friends.