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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

Hi wonder!

Welcome to forums!

You can contact your lender and look out for home improvement loans. Check out if your lender offers home improvement loans or not. If not, then you can even contact other lenders for the same. You can even speak to the lenders of this community and seek a no obligation free mortgage quote. This will help you know what type of rates and terms you would receive.

Feel free to ask if you've further queries.

Sussane
Posted on: 06th Sep, 2009 08:37 pm
we have a fixed rate of 6 % va loan on our home. the value currently is 129000. we also have a home equity line of credit in the amount of 120000, which is 400 a month on interest only. can we refinance and add this balance to our existing 1st mortage loan and pay off our line of credit. we dont know what to do. please advise us. thank you :roll:
Posted on: 14th Sep, 2009 07:57 am
hi syl,

you can refinance both the loans into one. if you refinance the loan, then you can get extra cash out which will help you in paying off the home equity loan. but i don't think you would be able to add the balance amount to the first mortgage.

thanks
Posted on: 14th Sep, 2009 11:42 pm
in refinancing, if you have sufficient equity in the property, you can, indeed, combine the two balances and pay them off with one new mortgage loan. yes, that is considered a cash out transaction.
Posted on: 15th Sep, 2009 06:35 am
my house is in foreclosure, can I get a second mortgage to pay what I owe to stop the foreclosure
Posted on: 22nd Oct, 2009 02:18 pm
Hi Guest,

As the property is already in foreclosure, I guess you are delinquent in your mortgage payments. In such a situation, you won't qualify for a second mortgage. If you want to save your property from foreclosure, then you should apply for a loan modification with your lender.
Posted on: 22nd Oct, 2009 09:19 pm
We have our house paid off that is worth aprox 75k and we want to use our house to get a equity loan to buy a lake house for 75k. If my world went bad and I couldn't make payments would they take both houses or just my main house that I had paid off ?
Posted on: 30th Oct, 2009 06:55 am
I would have to say if there is equity in your home get it out now! Just to say there is better ways to invest your money besides letting it sit in a depreciating asset. Peter Scalise
Posted on: 30th Oct, 2009 09:13 am
well of course, that wasn't the question, was it?

intercom, if you mortgage your current home to purchase a new property and subsequently default on that mortgage, the lender will foreclose on its mortgage, i.e. the current property.

is there a remote possibility that a lender could find itself losing money and seek retribution by placing a lien on your newly-purchased property? well, of course there is, but i'd like to think that's kind of far-fetched to say the least.

go ahead and do what you have planned.
Posted on: 30th Oct, 2009 02:18 pm
i am interest for equty loan $35000.-50000.
my first morgage is 304000. and value of the house is 5500000
Posted on: 02nd Nov, 2009 11:47 am
hi charles,

you can contact your current lender and apply for a home equity loan. similar to your primary mortgage, he would judge your credit score and income before giving you the loan. if you want, you can even contact other lenders and check out the type of rates and terms they are offering you. if you get better rates with them, you can go for it. it is not mandatory to take the second loan from your current lender. you can even seek a no obligation free mortgage consultation from the lenders of this community. this will let you know the type of rates and terms you would get.
Posted on: 02nd Nov, 2009 09:18 pm
i need to know what is the credit score for a second mortgage for an investmente propert when i have a stable job and my huby is self employee. How does it affect to lenders?
Thanks
Posted on: 10th Nov, 2009 11:33 pm
no name, your query is too vague for anyone to answer properly. where you are located will make a major difference in how you'll be treated as you search for a home equity loan. it might just be that the bank down the street from you offers loans to all comers, regardless of score. check there first, and stay local before you seek a national lender's viewpoint.
Posted on: 11th Nov, 2009 01:51 pm
what is the income to debt ratio to qualify.
Posted on: 23rd Nov, 2009 12:32 pm
Hi bengal!

Welcome to forums!

As far as I know, for conventional loans, the dti ratio is 28/36 whereas for FHA, it is 31/43. The VA limits are only calculated with one DTI of 41.

Feel free to ask if you've further queries.

Sussane
Posted on: 23rd Nov, 2009 10:28 pm
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