How a Second Mortgage Can Lower Your DTI: It’s Possible!

Why do some people take out a second mortgage on their home, and what does that mean? Mortgages are a significant financial investment. Why would someone want another?

Our staff is here to help you investigate loan options and arrive at a sensible solution that suits your finances. Today we’re going to delve into the details of second mortgages and introduce you to a way to reduce your DTI that you’ve probably never considered.

First Mortgages vs. Second Mortgages

Contrary to what you might think, a first mortgage isn’t necessarily referring to a first-time homebuyer. The first mortgage is the original loan on a property. When you come to MortgageDepot intending to purchase a home, you are applying for a first mortgage, even if you’ve bought 20 homes in your lifetime.

A second mortgage is when a person decides to borrow against the equity they’ve acquired in their home. Two examples of a second mortgage are a home equity loan and a home equity line of credit (commonly called a HELOC).

Home Equity Loans vs. HELOCs

We could go on for days about home equity loans and HELOCs, but we’ll discuss their details later. Today, we’re going to share the main difference between these options:

• Home equity loans are an up-front, lump-sum payment. You’ll repay the loan, at a fixed interest rate, in monthly payments over the life of the loan.
• HELOCs allow borrowers to draw approved funds as needed for a specific period. They come with variable interest rates.

Lowering Your DTI With a Second Mortgage: How It’s Done

Some lenders let borrowers use a portion of a second mortgage to pay off existing debt and potentially reap the benefits of a lower DTI.

How does this work? Let’s say that you have some high-interest debt to your name. You could pay off this debt using a home equity loan or line of credit with a lower interest rate. Doing this would consolidate your high-interest debt into one monthly payment at a more favorable interest rate.

With that lower interest rate, you can make higher payments on your principal and reduce your debt faster. Abracadabra! You’ve officially reduced your DTI and put yourself in a better financial position to tackle your real estate goals!

Still confused? Contact us today to learn how to use a second mortgage as a tool to reduce your DTI!

Connect with one of our loan consultants for more information.