Second mortgage: A way to borrow against your home equity

Jessica
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Sometimes you may need a lot of cash, but can't find any other way to get it, except by pulling equity out of your home. Here's where a second mortgage can help you. This article gives you an overview of second mortgages and covers the following aspects:

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What is second mortgage?

It is a loan taken out against your home after you have already taken out a first or primary loan. The equity that you have built up in your original home is utilized as the collateral to take out the second loan.

A second mortgage is considered as the subsidiary to the first one. In case you default on both the loans, it is always the first mortgage which is repaid first. The second mortgage is taken care of only after the first mortgage is being fully repaid.
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When should you choose a second mortgage?

There are situations when you may want cash out some of your home equity by taking out a second mortgage. They are
  • You have accumulated a large amount of debt and need to pay them off.
  • You wish to invest elsewhere or you may be begin a new business.
  • You want to avoid paying private mortgage insurance. This is possible only when you get a second mortgage that makes up 20% of the home purchase price.
  • You may want to spend on expensive items such as a new car, new property, or new appliances.
  • You want to remodel or add to your home.
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How much can you borrow?

A second home loan allows you to borrow based on your home's equity. The amount of the loan that you have already repaid is the amount of equity that you have built up in your home. Your equity symbolises your home ownership.

Usually, majority of the lenders offer you a second mortgage loan up to the point where the loan to value (LTV) ratio of the first and the second loan together amounts to 85% of the appraised value of the home. However, there are lenders in almost all states, except Texas and West Virginia, that allow you to take out second mortgages equal to 125% of the appraised value.
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What are the possible rates, terms and options?

Interest on a second loan will be higher than with a first loan. The reason behind this is that in case you default, the original mortgage is repaid first and the second one is repaid thereafter. So, it is quite evident that more risks are attached to a second mortgage than in case of the first mortgage.

Second mortgages are available as adjustable rate home equity lines of credit and fixed rate home equity loan. The lender will quote you a rate depending upon your credit score, total loan to value ratio, and current market trends. The loan term will vary from 15 to 30 years depending on the option you choose. But in general, a second loan is offered for a shorter time period than a first loan.
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How do you get a second mortgage loan?

In second mortgage, you use the same process you used to find your first mortgage. You need to shop around for a suitable loan by approaching different lenders. You can simply fill out a free short no-obligation free form to get quotes from community ranked lenders on this site. Then you should compare the quotes, find the offer that will work best for you. Finally, you need to fill out the necessary paperwork to apply for the loan. The lender will conduct an appraisal of your home in order to determine its current value, complete all the steps necessary to process the loan, and arrange for the loan closing. At closing, you will sign the note and security instrument required by your lender. You will be liable to pay the closing costs for the second mortgage also, similar to what you paid while obtaining the first mortgage loan.
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What happens to the second loan if you refinance the first?

When you refinance the first loan after getting the second mortgage loan, the second loan still remains in its subordinate position. Your refinance lender ensures that the refinance loan becomes the primary loan and the second loan remains subordinate to the refinance loan.

A second home loan gives you the chance to tap handsome amount of money in exchange of home equity. Moreover, you may be able to deduct some of the interest from your income taxes. However, there are a lot of additional costs involved with taking out a second loan.

In addition, if you default on the second loan, you may lose your home in a foreclosure. So, before making the decision to take out a second mortgage loan, you should make proper financial planning. You need to find out the total monthly obligations of taking out the two loans and check out whether it is within your affordable range or not.
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What are the limitations of a second mortgage?

Despite its various uses, a second mortgage is fraught with some limitations. These limitations are -
  • High chance of losing the home - By taking out this loan, you add to the risks of losing your home. If you fail to make payments on your second loan, you may end up losing your home. You need to ensure that the purpose for which you are taking out the loan is worth the risks that you are taking.
  • Rate is higher than the rate on first loan - The rates on second mortgage are relatively higher than the rates on the first mortgage loans. This is so because in the event of default, it is the original mortgage which is repaid first. The repayment of the second mortgage is taken care of later.
  • Fees may be hefty - Sometimes, a second mortgage may involve hefty fees. This adds to the costs of taking out the second loan.
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Mini Profile  Caron
Caron
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Joined: 19 Jul 2005
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Post     Post subject: costs of 2nd mortgages

A 2nd mortgage requires similar costs that are payable in a first mortgage. The closing costs range from 3% to 6% of the loan amount. Lenders charge an administrative fee of about $250 along with an appraisal fee that lies between $300 and $400 for a standard owner occupied single family residence. They also demand fee for obtaining and checking the credit reports. This credit fee ranges from $25 to $65. There are also the title and escrow fees that may be slightly less than that of the first mortgage.

Most lenders allow for a "Flag" title insurance policy in a second mortgage having loan amount of $200,000. This policy requires the payment of a flat fee of about $125. Often a "Sub-escrow" or "Mini-escrow" fee is also charged. This fee amounts to something between $225 to $250. Apart from all these costs, the lender also charges standard notary fee, recording fee and pay off fees lying between $60 and $150.
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Dauglas

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Post     Post subject: Deducting second mortgage interest

I am currently seeking for a second mortgage on my home. I will use the money for home improvements and to clear some debts. I have very little equity built up as I have recently bought the house. Can I write off the interest on the second mortgage? The loan is a 125% loan.
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Mini Profile  Jessica
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Post     Post subject: interest deduction on 2nd mortgages

Hi Dauglas,

Welcome to MortgageFit Forums.

Generally, you can claim a tax deduction on the interest that you are paying on your home mortgage. But you will have to acquire the property first and then borrow at least $100,000. You should also claim the interest on this loan as a qualified residence interest.

However for the interest to remain deductible there are certain limitations, for example, the secured loan balance cannot exceed the fair market value of the home. But a 125% loan is meant to exceed the fair market value of the home. And, lenders generally make such offers if you are willing to pay off the loan at higher interest rate and also if you have a good credit history.

You will be allowed for tax deduction on the interest on your 2nd mortgage but only if the sum of the first and second mortgages do not exceed your home value. Your home value is likely to increase if you go for home improvement. And, this will help to increase your liability to pay off the loan.

Regards,
Jessica
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tanesha

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Post     Post subject: home loan to purchase another with bad credit

I am single mother looking for a bigger home in a better neighbor hood. I have be in my current home for six years. I do own it. I however have bad credit and I belive the chances of my purchasing another home is next to impossible if someone has any information I would like their input Thanks
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Mini Profile  jerry
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Post     Post subject: RE:

Hi,

Welcome to the forums.

Nowadays lenders are willing to give loan to the borrowers who have low credit score. But the interest rate that you will be charged on the loan is surely going to very high.

MortgageFit has a large network of mortgage lenders. What you all need to do is sign up with them, so that their loan department can find the best lender suiting your needs.

But if you take my advice I would ideally want you to wait for some more time and work on improving you credit score by working out on some of the basics, like planning your monthly budget and meeting your bills on proper time.

Please feel free to ask if you have any more doubts. Very Happy

Thanks,
Jerry
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Mini Profile  Caron
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Post     Post subject:

Hi Tanesha,

I agree with Jerry; it is always better to improve your credit profile before you think of taking a loan. Please go through our section on credit repair for some tips on how you can improve your credit score.

Thanks,

Caron.
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Meredith

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Post     Post subject: second mortgage

I owe 105,000 on our house bought two yrs. ago. I took a home equity line of credit to get the other 10% for down payment. The house was initially assessed for 157,000. We have done alot of improvements. Can I take a second loan to get rid of the high interest debt I have.
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Mini Profile  blue
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Post     Post subject:

Hi Meredith,

You can take a 2nd mortgage provided you have built enough equity on the home.

BTW, what rates do you have on the debts?
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Mini Profile  jameshogg
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Post     Post subject:

Hi Meredith,

I understand your concern. There are no limits in the number of mortgages that you can take provided you qualify and you must also check that your purpose is served.

You can opt for refinancing of the 2nd mortgage also. If you get lower rate in refinancing your HELOC to a fixed rate second mortgage then you can go for it. But check whether the difference will benefit you when you need to pay the pre-payment penalty, if there is any.

James
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jojo

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Post     Post subject: second mortgage

we bought a house a year ago and we still owe about $280,000 and the value of the house is about $370,000 we want to consolidate all of our debt which will be around 80,000 can we still take a second mortgage of 80,000 and do you know how much monthly payment will i pay for the second mortgage
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Mini Profile  adonis
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Post     Post subject: RE

Hi, Jojo

Thats all depend on the amount of the loan and terms agreed. Basically it will be calculated on the interest as well.

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Woody

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Post     Post subject: 2nd Mortgage

I bought my home about six month ago. I do not really have any equity built up yet. can I do a 2nd mortgage?
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Mini Profile  Samantha
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Post     Post subject: 2nd Mortgage

Hi Woody,

Welcome to MortgageFit Forums.

You can get a home equity loan without any equity on your home with some lenders. For that you will have to pay significantly higher interest rates and closing costs. PMI will be required.

Home equity loans are cheap if you have already enough equity on your house. If you try to borrow before you have built some equity you will get it with a little shopping around but you need to pay higher costs and will get fewer perks.

God bless you.

For MortgageFit,
Samantha

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Remo

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Post     Post subject: Should I go for second mortgage refinance?

I have a mortgage and a second loan on the same property which is my primary residence. I have used the second mortgage to purchase a second home which I thought will be able to sell within a few months of time. But time is over and it has been over 6 months since I tried to sell the home. So, what I can think of is, either I go for the second mortgage refinance or rent the second home or short sale will be ok? Either of these would be better than foreclosure, isn't it? Pls help me decide which will be the right way.
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