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Second mortgage: A way to borrow against your home equity

Posted on: 28th Jun, 2005 06:49 am
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.

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.

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.

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.

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.

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.

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.

Related Articles
Related Forum Discussions

i am looking to consolidate my debts. do i refinance my first mortgage which is at 5.7% or go for a debt consolidation second mortgage?
Posted on: 30th Apr, 2007 02:58 am
Welcome Maine.

First of all, ask yourself how long you plan to stay in the current home and get an estimate of the refinance costs.

I personally feel that if you can stay in the property for quite a number of years, go for refinancing instead of taking out a debt consolidation second mortgage. This is because, the second loan against your current home would be offered at a higher rate and the blended rate (effective interest rate on both mortgages) will possibly be higher than the rate at which you can refinance.

Thanks.
Posted on: 30th Apr, 2007 03:06 am
Hi Remo,

You may go for a cash-out refinance on the second property so that by taking out extra cash, you can pay off the first mortgage on your primary home. Then, you will have to pay for two loans – the second mortgage which will be then considered as primary loan on your primary residence and the loan against the second home.

Thanks,

Sara
Posted on: 30th Apr, 2007 03:29 am
2 years ago I took a second mortgage and about 7 months ago I wanted to refinance it. But I found that I owed more than the house was worth. The company had both my mortgages and inflated the value by 25K. It was really impossible to refinance such a huge loan neither could I sell the property. So, I took help from the attorney general of Kansas and the company admitted that they had inflated the value. The company offered that they would re-write the loan on current appraised value of the property and if there was any difference, they would make it up within the origination costs. Guess what the diff is! 30K., what do I do, involve the attorney general again or should I just pay it off and get away from this problem. I am just skeptical that they are again charging more as they have done the first time and why on earth would I lose my hard earned money just because of such a company.
Posted on: 04th May, 2007 05:09 am
Welcome caira,

It's better to conatct an attorney or if you like to consult the attorney general as otherwise this company seems to taking away your money like anything. That unfair on their part.
Posted on: 04th May, 2007 05:12 am
Honestly I never heard of 30k origination cost. But you do not have to pay any of it right? They will be showing it as the origination cost but not charge you any amount, isn't it?

They have said that they will re write the loan to its present value so that at the time of refinance you don't have any problem. It means only the documentation for your loan will be modified.



Varvel
Posted on: 04th May, 2007 07:54 pm
"The company offered that they would re-write the loan on current appraised value of the property and if there was any difference, they would make it up within the origination costs. Guess what the diff is! 30K."
Caira, they will not be charging you this amount. As they have to modify the loan so that the previous error can be corrected they will show the difference amount as origination cost. Why you will pay for anything now?

If I have not understood your question correctly then let me know.

Thanks
Blue
Posted on: 10th May, 2007 06:44 pm
can i get a second mortgage when my first mortgage is going through chapter 13 bankruptcy currently.
Posted on: 12th May, 2007 10:24 am
Why do you want to go for a second loan when there is already an ongoing bankruptcy? I am not discouraging you but then it is just quite impossible. Anyone offering you a loan at this point of time would really have to trust you and be confident that you're a creditworthy borrower.

It's better that you carry on with the chapter 13 plan and make on time payments for about a year before you start looking for another loan. Allow for some time so that you can re-establish your credit already damaged.
Posted on: 12th May, 2007 10:29 am
Hi Rhonda,

Welcome to Mortgagefit forum.

You were not able to pay all your debts due to financial problems and that is why you filed bankruptcy. Then why now in the middle of the reorganization plan you want to take out a second mortgage?

Colin
Posted on: 12th May, 2007 04:51 pm
oh just that i was thinking of it. my house needs some repair and i need to fix them up and also if I could do paint the walls, that would have been great. But this bankruptcy!i was initially skeptical, just wanted to clear the first loan but had a job loss and my husband fell seriously ill, a lot of cash wasted in the nursing home but thank god he's recovering and I am the only one left behind to deal with this bankruptcy stuff. life's not that easy it seems there so much to deal with
Posted on: 13th May, 2007 10:29 pm
if I am taking a second mortgage then is apr on heloc different from what it is for a fixed rate type
Posted on: 17th May, 2007 04:11 pm
Hi Yau,

Welcome to Mortgagefit discussion board.

APR for a fixed rate second mortgage takes into consideration interest rate plus points & other upfront costs charged. But it is not so for HELOCs.

APR for HELOC does not include points & other charges and is based on initial interest rate only.

Do let me know if you have any other questions.

Thanks
Blue
Posted on: 17th May, 2007 04:20 pm
I am looking for some advice. I already got a first mortgage on my primary residence plus a second mortgage for the land which I am planning to build my new home on. The question is whether it will be possible to deduct the interest for this second mortgage?
Posted on: 28th May, 2007 03:45 pm
Hi Sanger,

Has construction of the new home started?

If construction of your home has not started which would result in you being able to occupy it within 24 months, this land will be considered as an investment.

And the interest paid for the second mortgage will not qualify as deductible mortgage interest.

Miller
Posted on: 28th May, 2007 03:53 pm
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