Second Mortgage Calculator: How it Works

As the economy shifts with various factors at play, many households may find themselves thinking about taking out a second mortgage. With that consideration, often there are many questions: Do I have enough home equity? How much can I borrow? What is the right amount to borrow under the circumstances?

A good place to start is a mortgage calculator that can use several pieces of information in order to answer your questions, and most importantly, provide an estimate as to how much you can take out by using a second mortgage loan.

In this article you will learn:

  • How a second mortgage calculator works
  • What information the prospective borrower needs to provide
  • How the second mortgage loan amount is determined

How a second mortgage calculator works

Like all mortgage calculators, a second mortgage calculator uses a series of borrower inputs in order to provide estimates as to the amount that can be borrowed and the projected interest and monthly costs. Second mortgage calculators may also provide estimated amortization schedules based on the projected loan amount. This gives the prospective borrower a sense of the amount of interest that will be owed over the entire duration of the loan.

A second mortgage calculator usually requires at least three pieces of information: the borrower’s home value, the amount remaining on the borrower’s existing mortgage, and the borrower’s credit score.

The borrower may wish to take out a home equity loan as a lump sum, or a home equity line of credit (HELOC) as a revolving line of credit, and second mortgage calculators can help estimate in either scenario. Some second mortgage calculators will also compare and contrast the two types of loans.

Other second mortgage factors are variable, and can also be used by a second mortgage calculator to show how the loan amount and interest change based on those factors. Those inputs might include the interest rate and loan terms such as the number of years for repayment — which could be 5 years, 10 years, 15 years or more.

Once the prospective borrower submits his or her information, a second mortgage calculator can provide the estimated amount that can be borrowed at the current interest rates, as well as the monthly minimum payment for the loan.

What information the prospective borrower needs to provide

In order to use a second mortgage calculator, the borrower will need to provide several pieces of information.

Home value: This can be an estimated value and should reflect a recent appraised value or a value obtained by an online search. It may not be the same as the purchase price of the home, particularly in areas of high home value appreciation.

The remaining mortgage balance: This is a specific piece of information that can be found on a recent mortgage statement or can be provided by the first mortgage servicer. A second mortgage considers both the current value and the remaining balance.

Credit score: This can be obtained via an official credit report from one of the three credit agencies Equifax®, Experian®, or TransUnion®, which each provide one free credit report per year. There may also be online resources available that can provide credit reports as well. Most lenders require at least a 620 borrower credit score in order to complete a second mortgage, though individual lender requirements vary.

With these inputs, a second mortgage calculator can determine roughly how much a prospective borrower can take out with a second mortgage. This estimate will also be based on the loan term, the interest rate, and the current products available.

How the second mortgage loan amount is determined

Many second mortgage lenders will lend up to 85% or 90% of the borrower’s home equity, meaning a second mortgage can be a very helpful financial tool for borrowers that have gained a significant amount of home equity or who have been making mortgage payments on their first mortgage for a long time.

The interest rate a borrower can access may depend on his or her credit score as often a higher credit score corresponds with a lower rate for the borrower.

It’s important to remember that second mortgages typically carry higher interest rates than first mortgages, because they are riskier for lenders. Borrowers will need to consider that a second mortgage — whether a home equity loan or a HELOC — will require a new monthly mortgage payment for the borrower in addition to his or her original mortgage payment. These are all considerations the borrower will need to think about in determining whether a second mortgage is the right choice for his or her situation.

A second mortgage can be a particularly helpful tool for certain borrowers, especially those who are paying off higher interest debt such as credit card debt, or for those that have a new one-time or recurring expense, such as major home remodel.