5 Things to Consider Before Getting a Second Mortgage

Posted On Tuesday, 05 October 2021 20:35

Buying a second home or taking out a second mortgage can be an excellent idea for some people. You can see the home as an investment property that you can rent out when not in use to generate some passive income. You can also use the home as a nice and comfortable place when you and the family take well-deserved vacations. Regardless of your reasons, there are many things to consider when taking out a second mortgage.

It’s a reasonably big commitment with more requirements and will likely require a larger downpayment than your first mortgage. If you’re still on the fence about buying a second house or if you really want to weigh out your options before committing to a second mortgage, you’ve come to the right place. 

The Deposit & Downpayment

The downpayment on your second mortgage will likely be much higher than the one you made on your first mortgage. However, this depends on several factors, such as the overall sales cost, credit score, the lender, and more. The typical downpayment required for a second mortgage is 20% but be prepared for more.

Additionally, buyers also have to consider the safety deposit. Lenders always view a second mortgage as a significant risk than your first one, so they ask for a much higher deposit. In fact, many lenders require up to 25% in deposits for second mortgages.

Stamp Duties

Stamp duties are taxes that are required for legal documents, specifically for asset or property transfers. The American government doesn’t impose a federal stamp tax. However, different states have different requirements. Stamp duties can range between 3%-15% depending on the cost of the house, which is something you have to take into account when applying for a second mortgage.

Debt-to-Income Ratio

Just like with your first mortgage, the debt-to-income ratio (DTI) plays a significant role in determining how much you can borrow. When calculating DTI, lenders take all existing debts into accounts, such as student loans, auto loans, and your first mortgage, before adding in the costs of your second mortgage.

DTI is calculated by dividing total monthly debts by one’s total monthly income. If you have a lower DTI, it will be easier to secure a second mortgage than if you have a high DTI.

Risk vs Reward

Whenever you invest, whether in property, stocks, or even cryptocurrencies, there is always a risk involved. There is no such thing as a definite success rate with investments, which you always have to consider if you’re considering taking out a second mortgage.

Remember, you will be making regular payments to pay off the mortgage for many years to come. So, it’s always best to consider the risks against the potential rewards of your investment. If you plan on renting out your second home, figure out how much income you generate from it and how long it will take you to break even on your investment. 

Credit Report

Along with your DTI, lenders usually consider one’s credit report and credit score before approving them for a second mortgage. Your credit report includes how consistently you make payments, all your existing debt, and all applications for new credit.

Before applying for a second mortgage, make sure to examine your credit report. Check if your credit score is desirable and that there are no red flags in the report.

A clean credit report makes it easier for lenders to decide on approving your second mortgage or not. High credit scores also attract better mortgages and lower rates. So, make sure that your credit report and credit score are all good when deciding on a second mortgage.

If you have an iffy credit report, we recommend making payments and doing other things that could potentially boost your credit score.

Conclusion

Investing in a second mortgage is a great idea for a lot of people. However, always remember that risks are involved, and a second mortgage is generally more challenging to obtain than your first one. Expect higher downpayment and deposit requirements, as well as a very extensive check for your credit score.

Before you decide on taking out a second mortgage, we highly recommend considering the factors mentioned above. While they aren’t the only things to consider with second mortgages, they are essential in helping you decide if it’s time to make a new investment.

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