Buying property for the first time is easier than buying it for the second time as the interest rates are higher due to certain factors. Not only the second home, if you look for a loan for the second time for any other purpose, be it home renovation, funding a college education, buying a vehicle, or for any other requirement, interest rates are higher, so you need to know the pros and cons of a second mortgage option as it may affect many other priorities, which we discuss further in this article. The terms second mortgage rates and second home mortgage rates have a thin line of difference, which you should know. In this article, we discuss the terms for better clarity. Let's have a look.
What is a Second Mortgage?
Before jumping to the term "second mortgage rates," it's important to know about second mortgages. The simple explanation of the second mortgage is that these are the second loans taken against already mortgaged property from a lender other than your first lender. These loans are either in the form of a home equity loan given in lumpsum for a fixed interest rate to be paid in fixed terms or in a home equity line of credit (HELOC) given with a variable interest rate.
In most cases, a second mortgage need arises out of sudden unexpected expenses such as heavy medical bills, tuition fees for kids, home remodeling due to urgent repair requirements, weddings, buying a vehicle, or some other purpose. In certain cases, a second mortgage is used to buy a second home either for self stay or for investment purposes.
When we discuss the term second home mortgage, it specifically means the mortgage for a second home and for no other purpose.
What Are the Points Considered by Lenders to Sanction a Second Mortgage?
A second mortgage can be granted once you build equity in your home by paying a part of the principal pending on the primary mortgage to ensure there's no change in the mortgage rates and the terms and conditions with the second mortgage lender. The other conditions are as follows:
Credit score: This is an important factor that decides your eligibility for a second mortgage. Most lenders offer the best loan terms with the best interest to the borrower with an excellent credit score.
Verification of employment record: Lenders verify the stability of your employment to check if you can meet the debt obligations or not. An additional source of income may add to your credibility further.
Verification of the source of income: Lenders verify the source of income of the borrower through tax returns and pay stubs to check the ability of the borrower to pay off the debt.
Down payment: In most of the second mortgage, you are expected to pay a higher down payment than the first loan which may range between $10%-20% of the purchase price of your home.
Assessment of debt-to-income (DTI) ratio: DTI ratio measures the ratio between the total monthly income and the debt. The second loan gets approved only when DTI is below 43%.
Tips to Consider When Applying for a Second Home Mortgage
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Always compare the rates of two to three different lenders, their terms and conditions, and customers' reviews of their services.
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Pay off debt before applying for a second mortgage to decrease the debt-to-income (DTI) ratio for the best interest rates from the lender.
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Once you identify the second home and the offer is accepted by the seller, complete the application procedure thereafter.
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You should have some cash reserve on hand for at least six months for unforeseen financial issues. In the worst situation, you should be able to manage the payment for six months.
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Make sure your home qualifies as a second home. If you spend more than 14 days in a year, your home qualifies for a second home, and if you spend less than 14 days in a year, it comes under the category of an investment home.
Know More About Second Mortgage Rates
Second mortgage rates are the interest rates charged when a loan is taken for the second time against the first home. These rates are divided into two categories: fixed and variable. As the name suggests, fixed rates remain fixed throughout the tenure of the loan, whereas the variable rates keep changing depending on certain factors. It's always advisable for the borrower to clearly understand the factors that may increase the rate of interest to avoid any misinformation adding to a financial burden.
Are Second Mortgage Rates Higher?
The second mortgage rates are always higher than the first mortgage because the risk attached to the second mortgage is more for lenders as in case of any default, the original lender has more lien on the property. The original lender can take the property as collateral in case of payment default by the borrower. Hence, the second mortgage rate is higher. Another fact to consider is that the second mortgage rate is lower when compared to other forms of credit, such as personal loans and credit cards.
| Second Mortgage Rates | |
| Years | Interest rate(%) |
| 15 | 6.83% |
| 30 | 7.75% |
Pros and Cons of Second Home Mortgage
Investing in property seems very lucrative, whether it's for staying purpose or as an investment. However, each decision has its pros and cons, and so do second homes. Here are some of the pros and cons you should consider before deciding to apply for a second mortgage.
Pros of Second Home Mortgage
Tax deduction: If you qualify for a second home (spend more than 14 days in the second home), you can deduct mortgage interest up to $750,000 (this combines both the primary and second home) and combined property tax on both homes up to $10,000.
Use of equity of the first home to pay for a down payment on the second: You may use equity in your first house to at least make the down payment on the second home.
Cons of Second Home Mortgage
Costly: Second homes have higher interest rates that lead to more interest payments over the years.
Hard to qualify for a second home mortgage: The lenders verify the DTI requirements discussed above in this article and decide if your application qualifies for a second home mortgage or not.
Conclusion
After reading the article, you might have understood that second-home mortgage rates are higher than the primary homes owing to multiple factors discussed in this article. As a homeowner, all you need to do is be mindful of every little detail, consider the pros and cons, and then conclude to apply for the mortgage.
