Q & A: Second Mortgages

Becoming a homeowner is part of the American dream. But homeownership is a serious financial undertaking, so most people use loans in the purchasing process. The government and other institutions want to make homeownership more accessible, so they provide home loans called mortgages.

Perhaps you're thinking about taking out a second mortgage on your home, but you're unsure where to start. Maybe you're thinking about refinancing your second mortgage on your property, but you aren't sure if you can or how to do so. As your partner in all things financial, Orrstown Bank is here to guide you through these important decisions. This guide covers the answers to some of the most common questions about second mortgages.

Q: What Is a Second Mortgage?

A second mortgage is a lien taken out on the portion of your home you've already paid off. A lien gives the lender a claim to the property should an owner default on their debt. You can use money from a second mortgage to pay off anything from credit cards to funding home improvements. While not the most common type of loan, second mortgages still account for a decent percentage of all new loans.

How much money you can borrow depends on your home equity value. You can calculate your home's lendable equity by multiplying your home's estimated value by 80%, and then subtracting your current first mortgage balance. Unfortunately, interest payments don't count toward your home equity calculations. Credit score and debt-to-income (DTI) requirements are similar to what is used to qualify for a first mortgage.

The good news is that your home equity can improve without you making payments. If the real estate market in your area goes up, it will increase the value of your house and also your home equity. Likewise, if you make significant improvements and renovations to your home, that can also increase your home equity. Home equity loans and lines of credit can be a second mortgage and can also be used to pay off a mortgage and be a first-lien mortgage.

Is a Home Equity Loan a Second Mortgage?

A home equity loan is a type of second mortgage, usually with the same lender as your first mortgage. This type of mortgage allows you to cash out a lump sum from your equity. The lender can then claim a second lien on your home in addition to their initial claim from the primary mortgage loan. Home equity loans also include interest that you have to pay back with the loan over a set time frame.

Is a Home Equity Line of Credit a Second Mortgage?

A home equity line of credit (HELOC) is a type of second mortgage that works like a credit card. Instead of a lump sum of cash, the lender sets up a line of credit for you to use over a specific amount of time. As long as you pay back the money, you can still use the full credit limit. So, if you qualify for a $10,000 HELOC and spend $7,000, if you pay back the $7,000, you could still use the full $10,000 limit later on. 

The HELOC is only available for a limited amount of time. If you still have a balance on your HELOC when the period ends, or when you sell your home, you'll have to pay it back in full. 

Q: Second Mortgage vs. Refinance — What's the Difference?

A second mortgage is not the same as a mortgage refinance. A second mortgage adds an entirely new, different mortgage payment. A mortgage refinance replaces your primary loan with a new one. When you refinance your mortgage, you can choose a different lender, change the loan terms and even switch out the kind of loan you take out. When you refinance, you can also:

• Change your monthly payment.
• Lengthen or shorten your repayment period.
• Access different interest rates.
• Take out loans against your primary balance, called a cash-out refinance.

You may prefer to refinance instead of taking out a second mortgage because you may have higher interest rates on your second mortgage than if you refinance. Second mortgages have fewer protections than primary ones, so lenders tend to ask for higher interest rates.

Q: Can You Refinance a Second Mortgage?

Yes, you can refinance a second mortgage. If there is a first mortgage and you only want to refinance the second mortgage on your property, this is known as a home equity loan. Home equity loans will have to be refinanced as a home equity loan again. Most often, second mortgages are home equity loans or home equity lines of credit.

If you want to know how to refinance a second mortgage, do some research to see if the costs of refinancing will result in enough savings to make the process worth it financially. If you decide to go ahead with refinancing, the steps to refinance your second mortgage are:

1. Look at your financials to determine the benefits of refinancing.
2. Meet with your lender to find out if you qualify for refinancing.
3. Research different lenders to find the best terms.
4. Collect the necessary financial statements and documents.
5. Apply for refinancing.

It's important to remember you need to keep making payments on your second mortgage even throughout the refinancing application process. The new terms of your mortgage will take effect once the lender approves your application.

Q: Is It Better to Refinance or Take a Second Mortgage?

The answer to this question depends on your specific financial situation. The only way to determine if one avenue is better than the other is to examine the pros and cons of each option. 

Refinancing

The advantages of a second mortgage include the following:

• Just one monthly payment
• Can alter the terms and rates to be more favorable
• For VA loans, you can borrow up to the entirety of your home's equity
• Only one lien on your home

However, refinancing does come with some potential downsides:

• You might have to accept a different interest rate.
• You can pay higher closing costs.

Second Mortgage

Some pros of taking out a second mortgage include:

• You can choose a home equity loan or a HELOC, giving you more flexibility.
• You get to maintain your current loan terms.
• You don't pay as many closing costs.

The cons of a second mortgage are:

• It's an extra lien on your home.
• You can't renegotiate terms, even if better interest rates are available.
• You add an extra monthly payment to your primary mortgage.

If you want to keep your current mortgage terms and you need to pay off a large debt or expense, a second mortgage might be the better option for you. However, if you want a lower interest rate and you determine you can pay off your mortgage faster, refinancing could be a great way to save you money.

Q: Can You Refinance Your Mortgage to Buy a Second Home?

If you want to invest in a second property or buy a vacation home, you can certainly refinance your mortgage to put money down on a second home. A cash-out refinance would be your best option for purchasing a second home since you can take a loan out on your first home's existing equity. When you take a cash-out refinancing loan, you increase your principal balance in exchange for a lump-sum loan.

There are a few crucial factors to keep in mind if you plan on getting a mortgage for a second home. For investment properties or vacation homes, you can put a down payment on the house as soon as your refinancing closes. However, if you plan to purchase a second property as a primary residence, it might be a year or more before you can officially move in due to certain lender terms.

Q: Can You Refinance a First Mortgage and Not the Second One?

Having a second mortgage can make refinancing your first one complicated but certainly not impossible. In the world of mortgages, there's a specific hierarchy. Your first mortgage lenders hold the primary position, meaning that their investment is repaid first if you default on your loans. Your second mortgage lender is a junior lienholder, which means they get their repayment after the first lenders do, but only if anything is leftover.

Refinancing your first mortgage puts it in the second position, but many lenders will not accept that. Mortgage resubordination is a process in which the second mortgage lenders subordinate themselves to the new lender you refinance your first mortgage with. The second lien holders will need to agree to this and usually require you to make a case for why it benefits them. For example, refinancing the first mortgage could reduce your debt and make you less of a risk than you were before.

Can You Refinance the Second Mortgage Only?

You might be able to refinance your second mortgage if you have good credit, sufficient income and a consistent payment history. While refinancing a second mortgage tends to be a little more complex than a first, there are a few options to do so, and your lender can help you determine which is the best avenue. Just be careful to do your research and ensure the closing costs will be worth it since second mortgage rates tend to be higher across the board.

Q: How Can You Refinance a First and Second Mortgage?

You can refinance your first and second mortgage by combining them into one. This can greatly reduce your monthly payments, but it could add a significant amount of time to your loan. Refinancing your first and second mortgage together can also mean additional closing costs and more accrued interest. While combining your loans may reduce your payments, you could end up paying more over a longer period of time, so take that into account when considering your options.

Q: Where Can You Get a Second Mortgage in Central Pennsylvania or Maryland?

If you're looking to take out a second mortgage on your Central Pennsylvania or Maryland home, Orrstown Bank is your best choice. We offer a high-touch lending experience, so you get all the benefits of a small bank along with big bank technological capabilities, like electronic delivery, e-sign and online portals to monitor your application status in real-time.

Orrstown Bank has the expertise, and we value transparency so you can be sure you're getting the most qualified lending advice. We use local decision-making processes to facilitate seamless loan closings and prevent frustrating delays. Our team works hard to offer competitive interest rates, and we monitor those rates daily to ensure you get the best loan options.

Learn More About Second Mortgages From Orrstown Bank

We're passionate about helping Central Pennsylvanians and Maryland residents enjoy the benefits of homeownership through responsible and accurate mortgage financing and advice. If you're thinking about taking out or refinancing a second mortgage, talk to an Orrstown Bank mortgage officer today!