Can I Get A Second Home Equity Loan? Everything You Need To Know

You’ve had your home for some time or recently purchased it at a steep discount. Either way, you’ve built up a significant amount of home equity and used a home equity line of credit (HELOC) to convert some of it into cash. But you’re wondering if you can take out a second HELOC to pull out untapped equity.

Read on to learn more about second HELOCs, how they work and where to get the best deal on this home equity loan product.

Getting a second home equity loan is a big financial decision that requires careful consideration. As a homeowner, you may have built up equity in your property over time by making mortgage payments and as your home appreciates in value. Tapping into this equity can provide you with funds to cover major expenses, consolidate debt, or finance home improvements. However, taking out a second mortgage also comes with risks that you’ll need to weigh. In this comprehensive guide, we’ll cover everything you need to know about getting a second home equity loan.

What Is A Second Home Equity Loan?

A second home equity loan, also known as a second mortgage, allows you to borrow against the existing equity in your home if you already have an outstanding mortgage. It is secured by your home, meaning your home acts as collateral for the loan.

Here are some key facts about second home equity loans

You can borrow up to 85% of your remaining home equity after deducting your first mortgage balance.
Interest rates are typically higher than first mortgages but lower than other types of loans
Loan terms usually range from 10 to 30 years
You receive the loan amount in a lump-sum payment upfront.
It has a fixed interest rate and fixed monthly payments.

Essentially, a second home equity loan allows you to convert a portion of your home’s equity into cash while keeping your first mortgage intact. The loan must be repaid with interest over a set repayment term.

How Do Second Home Equity Loans Work?

When you take out a second home equity loan, the lender places a second lien on your home. This means your home secures both your first mortgage and the second loan. Here is a step-by-step overview of how these loans work:

Determine your home equity. This is calculated by subtracting your outstanding mortgage balance from your home’s current market value.
Apply for a second home equity loan. The lender will review your income, credit score, debt-to-income ratio, and loan-to-value ratio.
Get approved for a loan amount based on your remaining home equity and ability to repay. Loan amounts are typically capped at 85% of your total equity.
Receive the loan proceeds in a lump-sum payment to use as you wish.
Repay the loan in fixed monthly installments over a repayment term, usually between 10-30 years. The term cannot exceed the remaining term on your first mortgage.
Interest charges accrue on the outstanding loan balance each month. Your monthly payments go towards interest first, then principal.
Continue making payments on your first mortgage separately.
Once the loan is fully repaid, the second lien is removed from your home.

As you can see, the process is very similar to taking out a first mortgage except you aren’t purchasing a new home. You are simply leveraging existing home equity for cash.

Pros And Cons Of Second Home Equity Loans

Second home equity loans offer both advantages and disadvantages to consider:

Pros

Access cash from your home equity without selling or refinancing
Typically lower interest rates than other loan options
Fixed monthly payments are predictable and easy to budget
Interest may be tax deductible (consult a tax professional)
Can be used for anything – no restrictions on usage

Cons

Closing costs of 2% to 5% of the loan amount
Monthly mortgage payments increase
Risk losing your home if you default on the loan
Loan amounts depend on how much equity you have
Lengthy application process of 2 weeks to 2 months

As you can see, second home equity loans offer a flexible way to tap into your equity but also come with risks. Make sure you can afford the higher monthly mortgage payments before proceeding.

What Can You Use A Second Home Equity Loan For?

Second home equity loans provide homeowners with cash to fund a variety of needs. Here are some of the most common uses:

Home improvements and renovations
Debt consolidation and credit card refinancing
Major emergency expenses or medical bills
College tuition or other educational expenses
Weddings, vacations, or other large purchases
Starting a business

The key benefit is you can generally use the loan for any legal purpose, unlike first mortgages used for purchasing a property. This flexibility makes a second home equity loan appealing for many major cash needs.

What Are The Requirements To Qualify?

As with any loan, lenders have specific requirements borrowers must meet to qualify for a second home equity loan:

Home equity: You must have sufficient equity available to borrow against after deducting your first mortgage loan balance. The more equity, the higher the chances of approval and loan amount.
Credit score: Minimum credit scores vary by lender but often range from 620 to 700. The higher your score, the better the loan terms you can qualify for.
Income: Documented stable income is required to prove you can afford both mortgage payments. Specific income thresholds depend on the lender.
Debt-to-income ratio: Your total monthly debt payments divided by gross monthly income. Lenders generally require this ratio be below 50%.
Loan-to-Value ratio: Compares loan amount to home value. Second mortgages usually cannot exceed 85% LTV.
Home appraisal: An appraisal is needed to verify current property value and available equity.
Homeowner’s insurance: Required to protect the lender’s interest in your home.

As long as you meet these key criteria, you should be able to qualify and get approved for a competitive second home equity loan. Shop around with multiple lenders to compare options.

How Much Can You Borrow With A Second Home Equity Loan?

The amount you can borrow depends primarily on how much equity you currently have accumulated in your home. Lenders generally let you borrow up to 85% of your remaining equity, calculated as:

Total Home Value – Existing Mortgage Balance x 85% = Maximum Second Mortgage Amount

For example:

Home Value: $500,000
First Mortgage Balance: $200,000
Remaining Equity: $500,000 – $200,000 = $300,000
85% of Remaining Equity: $300,000 x 0.85 = $255,000

In this scenario, you could qualify to borrow up to $255,000 with a second home equity loan. The greater your equity, the more you can leverage it for cash through a second mortgage.

How Much Does A Second Home Equity Loan Cost?

When getting a second home equity loan, you can expect to pay:

Interest rate: Usually 0.5% to 1% higher than first mortgage rates for borrowers with good credit.
Origination fee: Up to 2% of the total loan amount.
Closing costs: Average 2% to 5% of the loan amount, which covers lender fees, appraisal fee, and more.
Monthly payments: Principal, interest, taxes, and insurance. Will be higher than your current first mortgage payment.
Prepayment penalties: Some lenders charge this fee if you pay off the loan early.

Always compare rates and fees across multiple lenders. Ask about anydiscounts you may qualify for as an existing customer. This can help minimize the overall costs.

What Is The Process For Getting Approved?

Below are the typical steps to getting approved for a second home equity loan:

Check your credit reports and scores from all three bureaus. Address any errors.
Determine your home’s current market value and available equity. Online estimators can provide an estimate.
Shop and compare loan options from several lenders. Apply with the lender offering the best terms.
Submit your loan application and all required documents such as pay stubs, tax returns, bank statements, and IDs.
Get a home appraisal completed by the lender’s appraiser.
Receive a Loan Estimate from the lender outlining projected costs.
The lender will underwrite and verify your income, assets, debts, and credit history.
Once approved, you’ll receive a Closing Disclosure 3 days before closing.
Sign final loan documents and receive your funds at closing!

While every lender’s process differs slightly, you can generally expect it to take anywhere from 2 weeks to 2 months to complete a second home equity loan. Being organized and responsive can help expedite the process.

How Long Does It Take To Get Loan Funds?

After getting approved, you can expect to receive the loan funds in your account within:

7 to 14 days: If you choose an electronic closing option. This allows for a faster closing timeline.
30 days or less: For a more traditional closing with mailed documents and an in-person signing.

So if time is a factor, ask your lender about electronic or hybrid closing solutions that can shorten the waiting period to access your funds after approval.

Are There Alternatives

Do You Need to Use the Same Lender for the Second HELOC?

No, you’re not obligated to use the same lender to get a second HELOC on your property. However, it’s worthwhile to shop around with multiple lenders, including online lenders, traditional banks and credit unions, to find the best deal.

When considering a HELOC, it’s important to explore all of your options to find the best solution for your financial needs. CrossCountry Mortgage is a reputable lender that offers a range of mortgage solutions, providing expert guidance and support throughout the borrowing process. By working with their team of experienced loan officers, you can gain valuable insights into the terms and conditions of your loan, including interest rates and repayment schedules. Their HELOCs let borrowers with a healthy credit score, and DTI borrow up to 80 to 85% of their home’s value, closing in as fast as 21 days. Contact CrossCountry Mortgage today to explore your options and find the right solution for you.

Potential Complications of Multiple HELOCs

While multiple HELOCs give you more capital, you have to repay the debt over time. Using up your HELOC funds quickly can put you in a tight situation when the draw period concludes. Once the remaining balance converts into a loan, you will have to keep up with payments to keep your house. Your house is collateral, and a lender can claim possession of your property if you do not keep up with your HELOCs and your current mortgage.

HELOCs also have variable interest rates, which creates less predictability. If interest rates increase, you will suddenly have a higher monthly payment. Your balance will also grow faster if rates go up.

There’s also a chance that the way you use your HELOC doesn’t turn out as planned. Some real estate investors take out HELOCs only to end up with unprofitable properties. While leverage is a great thing when everything works well, it can turn into a disaster if you face some of the big challenges in real estate, such as squatters, lawsuits, and local laws that push landlords into a corner.

HELOCs have their perks, but ignoring these noteworthy disadvantages can lead to a less-informed decision. It is important to know the pros and cons before using this financial product or taking out multiple lines of credit against your home.

How to use your EQUITY to buy another home (step-by-step)

FAQ

Can you have two home equity loans?

Can You Have Multiple HELOCs or Home Equity Loans on a Property? Yes. There is technically no limit to how many HELOCs and home equity loans you have on the same property. Most lenders will allow a well-qualified borrower to access up to 80% of their home’s equity through HELOCs and home equity loans.

How is a $50,000 home equity loan different from a $50,000 home equity line of credit?

The line-of-credit arrangement also means you’ll only pay interest on the amount you borrow, at least initially. With a home equity loan, you’ll be responsible for interest on the entire loan balance, even if you don’t use all the funds.

Can I take out a home equity loan if I already have one?

There’s no regulation that says you have to work with the same lender to get a second home equity loan. However, on the off chance that a lender approves you for a second home equity loan, they might be more likely to approve you if they hold the first one than if you went with a totally different lender.

Can I pay off a home equity loan with another home equity loan?

You may be able to refinance the HELOC itself, either to another HELOC or to a home equity loan with a fixed-interest rate and payment. Both these HELOC repayment options typically have the advantage of lower closing costs and less hassle than a cash-out refinance.

Can you get a second mortgage if you have equity?

When you have sufficient equity in your house, you might choose to tap into those funds. Second mortgages, which include home equity loans, offer a solution for getting your hands on the funds you need. While a home equity loan is a type of second mortgage, a second mortgage is not just a home equity loan.

Can you get a home equity loan for a second home?

A home equity loan is often taken out in the form of a second mortgage. This means that you can use the equity from your first home to finance a second property, resulting in two mortgages for two properties.

Can I use a home equity loan to buy another house?

Yes, you can use a home equity loan (also known as a second mortgage) to buy another house. Using a home equity loan can eliminate or reduce a homeowner’s out-of-pocket expenses when purchasing another home. However, taking equity out of your home to buy another house comes with risks. Learn more about using a home equity loan for a second home.

Should you get a second mortgage?

A second mortgage, such as a home equity loan, offers the benefit of accessing your home’s equity. This flexibility allows you to use the money for various purposes, like making home improvements that could potentially increase your home’s value. For example, you could overhaul your kitchen.