Second Mortgage Calculator: How Much Can I Borrow?

A second mortgage is sort of a secondary loan while you still have the primary mortgage. But of course, you have to pay that first. Learn more.

Having a home under your name is truly a blessing, but to reach that status, people buy mortgages to buy homes. It is a very popular method of becoming a homeowner these days.

Mortgages are a simple process; you choose a house you like and you go to the mortgage lender. You send an application for the mortgage to be approved (meaning the lender will lend you the loan amount), and when it gets approved, you get a lump-sum amount up front to pay for the home. Over time, the borrower is then required to pay off the principal amount including interest to the lender.

The lender also keeps the house as collateral; meaning if the borrower were to default on the loan, the lender is well within his rights to sell the house and pay off the remaining loan. This is all part of the primary mortgage. There is a second mortgage too, let’s see what that is.

Second Mortgage Definition

The primary mortgage which has been lent to you stays there; you have been given an amount which you have to pay with interest in monthly installments. Once you pay the whole loan, that is when you’re officially the owner of the loan.

What if you have another major expense that needs to be taken care of? Maybe a student loan debt or a wedding planned in the next couple of months? It is very much possible that you’re not given another loan because you haven’t paid off your primary mortgage yet.

That is when you have the option of a second mortgage- meaning borrowing against the equity of your home. A second mortgage helps homeowners get a smaller loan against their home equity- which is also known as the home equity loan.

Second mortgages are also to be repaid within a specific period of time, with an interest rate decided upon the beginning of the agreement. The second mortgage interest rate is relatively higher. This is because the borrower is likely to default on the second mortgage, because payment for the first one is the priority. And of course, the second mortgage has to be fully paid before another loan can be obtained against home equity.

Second Mortgage Example

How second mortgages work is fairly simple, but with all the math involved, it can be a little tough to understand. Here’s an example:

Chris has an auto loan. The balance is $10,000, with an interest rate of 9% and two years are left on the term. Consolidating that debt to a home equity loan at a rate of 4% with a term of five years would actually cost him more money if he took all five years to pay off the home equity loan.

And now, his home is collateral for the loan instead of his car. So if Chris defaults on the loan, he could lose the house which would be more dangerous than him losing his car.

That is how a second mortgage works.

Second Mortgage Requirements

Just a recap: if a borrower has a first and second mortgage, and they default on the loan, the first mortgage lender has the right to go after your house (collateral). This makes the job of second mortgage lender A LOT riskier.

So, a second mortgage lender has a stricter criteria as requirements too. Here is what is essentially required from the borrower:

  • Equity: The second mortgage lender cares about equity- and lots of it. The borrower must have more than 20% equity on their home. They will probably hire an appraiser to calculate the exact amount of equity on your house. And that way you can see how much of a second mortgage loan you can borrow.
  • Credit rating: Usually a good credit score is required for a second mortgage, usually 620. This will get you a competitive rate in the market and maybe a lower interest rate than usual.
  • Debt-to-income ratio: This metric shows how much debt you already have against your monthly income, and mortgage lenders want it to be less than 43%. That is how you will qualify for a second mortgage.

Second Mortgage Lenders

Second mortgages are given out through three sources:

Lender Example Company Product Interest Rate Credit Score Minimum Equity
Major bank TD Bank Home equity line of credit 2.50% 650-900 25%
Trust company Home Trust Mortgage (in second position) 15.00% 550-700 10-15%
Private mortgage lender Tridac Mortgage Corporation Mortgage (in second position) 10.00% Less than 600 10% or less

Note: Sample rates have been extracted online, courtesy of RateHub.

Second Mortgage Loan Calculator

A second mortgage loan calculator is a vital online tool that helps you determine how much you can borrow against your home equity. Before you approach a lender, it’s crucial to crunch these numbers to set clear expectations.

The loan amount you can secure depends heavily on your credit rating, your debt-to-income (DTI) ratio, income, and home equity, among other factors. If you think your current qualifications might not fetch you the loan amount you desire, consider taking steps to enhance your borrowing power. You can make a larger down payment, cut down your debt—even marginally—or boost your credit score through consistent on-time payments.

This calculator will help refine your borrowing estimate based on your financial credentials. Remember, it’s essential to borrow only what you need since you’re already managing a primary mortgage.

Moreover, you must clear your first mortgage before you can start paying off the second one, setting you up for potentially decades of debt repayment. Thoroughly assess all your financial avenues before committing to another mortgage. It’s also wise to compare various lenders to secure the best interest rates and terms that won’t strain your finances.

By shopping around and carefully considering your options, you ensure that taking on a second mortgage remains a viable and financially sound decision.

John Otero

John Otero

John Otero is an industry practitioner with more than 15 years of experience in the insurance industry. He has held various senior management roles both in the insurance companies and insurance brokers during this span of time. He began his insurance career in 2004 as an office assistant at an agency in her hometown of Duluth, MN. He got licensed as a producer while working at that agency and progressed to serve as an office manager. Working in the agency is how he fell in love with the industry. He saw firsthand the good that insurance consumers experienced by having the proper protection. John has diverse experience in corporate & consumer insurance services, across a range of vocations. His specialties include Major Corporate risk management and insurance programs, and Financial Lines He has been instrumental in making his firm as one of the leading organizations in the country in generating sustainable rapid growth of the company while maintaining service excellence to clients.