It’s time for more mortgage Q&A: “Can you have two mortgages at once?”
This question has come up recently and despite all the content on my site, it’s something I’ve never really addressed.
So let’s talk about it! In short, yes, you can borrow two houses at the same time, or three depending on the circumstances.
It is actually quite common to have a second mortgage, although the reasons why can vary.
And no, it’s not a bad thing to have two bills, it can actually be a smart move.
Can You Have Two Credits?
In my second article on mortgages, I briefly touched on the possibility of having two mortgages and that in the past (or even now) it can have a negative meaning.
The long and short term of a person who has (or needs) two mortgages may suggest that they are financially stressed.
But that is not true for many reasons, which I will state here.
Before I do that, I want to clarify that you can hold multiple bills in one place at the same time.
For example, you can take out a first loan when you buy a home, and later take out a second loan after it.
Or you can buy a home with two mortgages at the same time, known as a piggyback loan (for obvious reasons).
You can also own multiple properties with multiple loans attached, or even two properties with two mortgages on each property, for a total of four loans.
The possibilities are truly endless, but what you get is completely normal.
Why Can Someone Have Two Debts?
Now let’s talk about why. There are various reasons.
It’s common for you to tap your equity once you’ve accumulated some, perhaps a few years after buying your home.
Let’s say you bought a home for $400,000 with a 20% down payment to avoid mortgage insurance and secure a lower interest rate.
Now it’s worth $500,000 and you’ve paid it back. If you need/want cash, another option is to tap your available home equity, which is the difference between your appraised value and the outstanding loan amount.
Pretend the outstanding loan balance is now $350,000. That means you have $150,000 of equity at your disposal.
However, lenders usually won’t let you tap EVERYTHING your fit, so a pillow is often needed.
This can mean you can borrow 85% or 90% of the present value, so in our example up to $100,000.
If you were to do this, you could take out a home equity line of credit (HELOC) or home equity loan.
That can be a common situation when a person gets two loans at the same time.
Another way to do this when they’re stuck with one mortgage is to refinance, where you swap your existing mortgage for a shiny new one.
But considering where mortgage rates are right now, it’s probably a better deal to get a second mortgage.
This way you can hold on to your low-rate mortgage and save on interest in the process, even if you need cash.
Home Buyers Will Refinance Two Loans To Avoid Mortgage Insurance And Keep A Lower Rate
Another common situation where you get two loans is the piggyback loan I mentioned earlier.
This is less common today because you can now buy a home with 3% down through Fannie Mae or Freddie Mac. Or even zero down on most loan programs.
But home buyers will sometimes buy a property using two loans.
For example, a first mortgage is 80% loan-to-value (LTV) and a second mortgage is 10%.
This means they only need a 10% down payment AND they can avoid mortgage insurance (PMI) again because they got a first mortgage set at 80% LTV.
So the trick is to both get a lower interest rate on the original mortgage due to lower home equity price adjustments, and avoid monthly PMI costs.
To that end, it’s not a sign of financial stress, but an important step to save money, whether it’s splitting your home loan into two, or keeping your original mortgage and its low interest rate intact when you tap into equity.
