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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 bought my home paid cash no notes cost just 60,000 can i take a 2nd mortgage out
Posted on: 24th Nov, 2009 09:44 pm
Hi g,

You've mentioned that you purchased the property for cash. Thus, there's no mortgage on it. In that case, if you take a mortgage on the property, it would be your first mortgage and not second. However, in order to get a loan, you'll have to qualify for it. You should have a good credit score and a stable income for getting a loan.
Posted on: 25th Nov, 2009 09:31 pm
Looking to sell a home that has a first mortgage and home equity line. Total balance is 80,000 more than the home is worth. If I sell and pay off mortgage and a portion of the equity line, will i still be able to pay the balance of the equity line over time as im doing now?
Posted on: 29th Nov, 2009 01:23 pm
that's a question for your second mortgagee to answer.

what you've just defined is a short sale. you need to negotiate with your lenders to even begin to contemplate such a step.
Posted on: 29th Nov, 2009 07:47 pm
was wondering if i should take a home equity loan for 50,000 or to do a mortgage to pay for a new home. right now i owe 11,000 on my current loan, with the 50,000 loan i would pay of the 1st mortgage of 11,000 and use the rest to put down on the new home..
Posted on: 05th Dec, 2009 05:10 pm
Hi Ray!

Welcome to forums!

You can take a home equity loan and pay off the first mortgage and use the rest of the amount as a down payment towards your new home. However, you should note that though you pay off your first mortgage, you would be liable to clear off the home equity loan along with the mortgage on your new home.

Feel free to ask if you've further queries.

Sussane
Posted on: 06th Dec, 2009 08:47 pm
a home equity loan is certainly the easiest way to borrow $50K. most lenders will turn up their noses if you propose that as a first mortgage amount. if you can find a reasonable rate and good terms, then go for it.
Posted on: 06th Dec, 2009 08:48 pm
I am not 100% understanding what a 2nd mortgage is. Does a home have to have equity in order to request a 2nd mortgage? We bought our home last year but due to the economy do not have any equity , we are considering a 2nd mortgage to pay off high interest rate credit cards. What is our options?
Posted on: 08th Dec, 2009 11:56 pm
angelaw, a second mortgage is simply an additional mortgage on a home that is subordinate to the first mortgage. first, second, etc. are merely the sequential notations. in order to obtain a second mortgage, one must have equity in a property...not just equity, but a good portion of it. if you only bought your home last year in this troubled real estate market, the odds are awfully strong that you lack the equity that would allow you to borrow in that fashion. depending on how much you are seeking, and on your income, credit, etc. you may consider a personal loan. rates on those, of course, are higher than on mortgages, to account for risk.
Posted on: 09th Dec, 2009 05:03 am
Can I use a 2nd mortgage on my home to buy a new place in a different state and then sell this one?
Posted on: 17th Jan, 2010 02:56 pm
If there is equity in the property, then you will be able to take a second mortgage on it and use the money to buy a new property. However, as you sell off this property, you will have to clear off both the mortgages for the present property.
Posted on: 18th Jan, 2010 01:14 am
though my move was only 8-10 miles, i used the equity built up in my former home to make a purchase of a new family home with substantial more land than previously i had owned. when my old home's sale date came around, i simply paid off that loan. i consider it substantial blessing that i had the opportunity to cash in from a sale and came out whole on the other side.
Posted on: 18th Jan, 2010 07:10 pm
Can you get equity cash out of your home at purchase? I would like to know if it is legal to receive cash at closing if mortgage company is aware that you are getting cash back?
Posted on: 22nd Jan, 2010 05:05 pm
not on a purchase, help, no you cannot. i will add, however, that lenders used to offer home equity lines of credit to new purhasers in the past, hoping that they'd use the lines to increase their indebtedness. if anyone is still doing this, i'd be quite surprised. the problem that arose is that people did, indeed, increase their indebtedness and then ran into difficulties with paying those accounts.

and here we are in january of 2010 dealing with those issues.
Posted on: 23rd Jan, 2010 09:18 am
We took out an equity loan 6 years ago when we purcashed our home. Now with the interests much lower we want to do a cashout refiance on our mortgage, will the equity load hender us in doing this?
Posted on: 08th Feb, 2010 07:47 am
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