When you take out a second mortgage you can potentially take out a loan for an amount equal to 100 percent of the equity you have in your home. You can calculate your equity by subtracting your existing mortgage balance from the current market value of your home. However, lenders often restrict second mortgage loan amounts so that the combined balances of your first and second mortgages do not exceed 80 percent of your home's value.
Debt to Income
Prior to determining a dollar amount for a second mortgage based upon your home equity, lenders first calculate a loan amount based on your debt-to-income ratio. A DTI ratio calculates the percentage of your monthly income that goes toward debt payments. Typically, lenders do not allow your DTI ratio for a home loan to exceed 40 or 50 percent of your gross monthly income. If you have a lot of equity in your home but your existing debt payments account for 50 percent of your income, then you cannot qualify for a second mortgage unless you use the loan to pay off other debts. Lenders determine the maximum payment you can afford and then calculate a loan amount based on that payment amount.
Lenders do not usually sell home equity loans to other banks and investors do not buy these loans. If you have a first mortgage balance that exceeds 80 percent of your property value, you must buy private mortgage insurance to protect your lender in the event that your home goes into foreclosure. However, you are not required to buy PMI for a second mortgage, which means that your lender assumes the risk of borrower default. To minimize this risk, lenders often cap second mortgages so that you do not access 100 percent of your home's equity. Capping your loan means that if you default on your loan, the lender has more chance of recouping the balance owed through a foreclosure sale.
Under state of Texas laws you cannot take out a second lien, such as a home equity loan, if the loan amount combined with your first mortgage exceeds 80 percent of your property value. Furthermore, if you take out a second mortgage in the form of a home equity line of credit, your line balance combined with your first mortgage cannot exceed 50 percent of your property's value. If you live in another state, you can typically borrow 100 of your property value.
When you take out a fixed-rate term loan your lender cannot require you to pay the loan off early. However, if you take out a second mortgage in the form of an equity line of credit, your lender can freeze or reduce the line amount. Your lender cannot force you to pay off an outstanding balance prematurely but can prevent you from drawing on the available balance on the line if your home loses value after you establish the line of credit.
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