How to Apply for a Second Mortgage

Second mortgages are cheaper than credit card debt, but they can come with risks.

Second mortgages are cheaper than credit card debt, but they can come with risks.

A second mortgage allows you to use your house as a source of cash. You take out a second mortgage by borrowing against your equity, the value of your house greater than you owe on the mortgage. For example, a $300,000 house with a $220,000 mortgage means there is $80,000 in equity. You can borrow against equity in a single lump sum or apply for a home equity line of credit, HELOC, that you can draw from when you need it.

Talk with your lender about how much a second mortgage will cost you. Just like your first mortgage, you have to pay to borrow money -- not only interest, but appraisal fees, title insurance, taxes and attorney fees. Find out the costs and the interest rate on the loan before you commit to taking the loan.

Show the lender you can pay back the money. Before you apply, gather your financial records: Pay stubs and W-2 forms to prove your income and information about your monthly debt payments. Most lenders want to see a total debt load -- first mortgage, second mortgage, credit card bills, student loans -- under 36 percent before they'll give you an interest rate you can live with.

Ask the bank's appraiser how much equity you have to borrow against. If you took out an $260,000 mortgage on a $300,000 house, then paid off $30,000 of the loan, that doesn't guarantee you have $70,000 in equity. If your home's value has gone up, you may have more equity, but in a bad market, your house may be worth less than the $230,000 left on the mortgage.

Calculate how much a second mortgage you can afford. The bigger the mortgage, the bigger the payments. Learn how much your monthly payments will be and if it's too much for your budget. Consider a smaller loan or look for a lender offering lower interest rates.

Sign for your loan. If your credit ratings and your financial records all show you to be a good risk, the bank is probably happy to take your money.

Items you will need

  • Pay stubs
  • Tax returns

Tip

  • Home equity loans can be good for single big purchases, such as a paying off high-interest credit cards, replacing your roof or a major medical bill. HELOCs work better for recurring payments, such as tuition and fees for graduate school. Lenders are happiest when your first and second mortgage combined add up to no more than 80 percent of your equity. You can find lenders that offer larger second mortgages, but the interest rate will be much steeper.

Warning

  • HELOCs have a variable interest rate so you run the risk of ending up with steep monthly payments if you take one out. Second mortgages are a better deal than most loans because the interest rate is low. Unlike a credit card company, however, your second mortgage lender can foreclose on your house if you don't make your payments. If you're not good at managing money or you're taking out a second mortgage for a luxury purchase, such as a vacation, you may regret it down the road.

About the Author

Author of two film reference books, "Cyborgs, Santa Claus and Satan" and "The Wizard of Oz Catalog." Published in Air & Space, Backpacker, Newsweek, The Writer, and multiple trade journals (can fax samples if requested, don't have them available digitally)

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