A second mortgage is any loan taken out on a home that's in addition to an existing first mortgage. Second mortgages are generally smaller in size than first mortgages, although they can still be a large sum of money homeowners can use for anything from renovating a home to sending a child off to college. Obtaining approval for a second mortgage can rely on many things, ranging from a person's existing home equity, to their current income and debt levels, along with their credit score.
Home equity loans and home equity lines of credit are two types of second mortgages that generally only require a person to have equity in their home. With these types of loans, a homeowner can usually borrow up to 80% of the equity they currently hold in their home. Because the equity is already there in the home, and already the homeowner's, income and credit scores are generally not taken into consideration when approval is being given for the loan. While home equity loans and home equity lines of credit are most often second mortgages, they can be used as a first mortgage as well.
Instances when a person's credit score will affect approval outcome of their second mortgage is when the loan is set up as a traditional mortgage, and is just in existence along with the first mortgage. When this is the case, both income and debt levels will be considered, as well as a person's credit score. A higher credit score will mean less risk for the lender and so, that loan will come with lower interest while a lower score may mean higher interest, or possibly rejection of the loan application.
Because the interest rates on different loan applications will be so varying for second mortgages, banks and lenders don't generally advertise what their current interest rate on second mortgages is. While it will still most likely be higher than the interest rate you're paying on your first mortgage, it will also be much less than other types of loans such as credit card loans and personal loans.
When considering what the final cost will be of your second mortgage, it's also important to know that closing costs are often attached to second mortgages, and these can cost an additional 2% - 5% of the loan. These costs will include things such as appraisal fees, legal fees, title searches, title insurance, home surveys, and other typical closing costs. Not all second mortgages come with all or any of these closing costs; but if yours does and you don't want to pay them out-of-pocket at time of closing, you can have them included in the loan paperwork and they will be deducted from the final amount that you receive at closing.
When it comes to second mortgages, there's more you need to think about than just what type of second home loan you want. You also need to consider things like interest rates and closing costs, so that you know what that second mortgage will really cost you.