Second Mortgage for First Time Home Buyers: What You Need to Know

There are many reasons that people want to take out a second mortgage on their home, but before we get to those reasons, understanding second mortgages is a good idea. A second mortgage is a loan on the equity of your home – that is the money that you’ve paid off on the principal (original amount) of your first mortgage. If your first mortgage was for $100,000 and you’ve paid off $25,000, and your house is now worth $150,000, you have $75,000 in equity. Most lenders will allow you to borrow up to 75 per cent of the value of your home, (there are some lenders that will allow you to borrow up to 125 per cent). In the case above, you’d be able to borrow up to $112,500 (75 per cent of the value of a $150,000 home). In some cases, the mortgage company will subtract the $75,000 you owe to your first mortgage, allowing you to borrow $37,500. Talk with your lender about exactly how much you can borrow before making your final decision.

Top reasons for taking out a second mortgage

There are many legitimate reasons for taking out a second mortgage, especially for first time home buyers. The two most common reasons for taking out a second mortgage are to pay off other debts and for home improvements.

Many first time homeowners will take out a second mortgage to pay off other debts. The interest rate that you get with a second mortgage is much lower than the interest rate you’re paying on your credit cards and other loans. For this reason, a second mortgage can pay off all other debts and have you spending much less in interest than continuing on with your current interest rates and debts.

One of the best and most popular reasons for a second mortgage is to do home improvements. The reason this is one of the best reasons for a second mortgage is that while you’re borrowing against your home’s equity, you’re using it to increase the equity in your home.

In the case discussed earlier, you have $37,500 in useable equity in your home, and up to the potential $75,000 in equity to borrow. If you borrow the $37,500 to do home improvements and put it all into your home, the improvements could raise the value of your home to over $200,000, now, you have even more equity in your home. Using a second mortgage for home improvements is a good way to get approved too – increasing the value of your home means to the lender that if you default on your payments, they will be able to recoup their funds from the sale of your house.

Another reason that people take out a second mortgage is to finance the education of their children in college. While this usually doesn’t apply to first time homeowners, it certainly can. There are many people who have a difficulty breaking the cycle of debt and not owing their own home until later in life.

The key to borrowing equity from your home in a second mortgage is to actually have equity. The more equity you have, the better off you are. Even if you have bad credit, but have equity in your home, you will likely qualify for the loan. Second mortgages hold your home as collateral for the funds. While the first mortgage holder gets first payment from the sale of your home should you default on your payments, the second mortgage holder is likely to get their money as well (unless you’ve over – borrowed and borrowed 125 per cent the value of your home). This is the reason that borrowing more than 75 per cent the value of your home is not a good idea – if you default on your payments and the bank forecloses on your home and there’s not enough money to pay both the first and second mortgage, you’re still held liable to pay the remaining money to the second (and first) mortgage companies. However, if you have adverse credit or a bad credit rating, you’re not likely to be approved for a 125 per cent loan to value second mortgage.

Who to call for a second mortgage

If you’re a first time home owner and are looking for a second mortgage on your home for whatever reason, the best place to start is with your first mortgage holder. Because they hold your first mortgage and already have your file, they are the most likely to say yes. However, if you don’t want to use the same company that holds your first mortgage, you’ll have to do some hunting.

You have a few options for this as well – you can apply at various lenders yourself or you can hire a mortgage broker to find you a second mortgage. A mortgage broker works with several lending companies and can come back to you with several options/quotes for a second mortgage. It’s important to do some shopping for your second mortgage to find the best interest rates and terms that you can – this will help you save money in the long run, which is always important.

What you need to provide for a second mortgage

You needed a down payment for your first mortgage, but you’re not required to have one for your second mortgage – it is based on the value of your home. What information do you have to provide to the lenders (or mortgage broker) to apply for a second mortgage? Essentially you’ll need to give all the same information that you gave when you applied for your first mortgage, including:

• Job history and pay stubs for two month’s employment or last year’s tax return
• Credit reports (the lenders or mortgage broker will acquire these)
• Your personal information
• Any personal information of a co-signer.

If the house you live in is shared title with another person, such as your spouse, you will need to have them on the second mortgage as well, or have a signed and notarized letter stating that they are aware of you taking the second mortgage on the property on your own and that they will allow it.