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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

we refinanced our primary home and took out equity for improvements doo we have to claim that money
Posted on: 10th Feb, 2010 01:51 pm
Hi RayRay,

The equity lender may not be ready to subordinate his loan for the refinance. You need to negotiate with him for that or you will have to convince the new lender to subordinate the new loan.

To anony,

You need to consult your tax adviser in this regard. He will be the best person to help you in this case.

Thanks
Posted on: 10th Feb, 2010 09:01 pm
anony, when you obtain cash out from a refinance, it is absolutely not taxable income. it is a loan and you are liable to pay it back.
Posted on: 11th Feb, 2010 10:54 am
hi. i'm looking into buying a fixer as an investment property. Was wondering if I'd be able to take equity from a property that is NOT a primary residence. I would need some money after fixing it up so would I have to sell it or could i take some equity and then rent it out?
Posted on: 12th Feb, 2010 03:13 pm
it's awfully difficult to get cash out on a refinance of an investment property - depending on the property type, you could be looking at 70% loan to value at best. it's understandable - people are more likely to bail out on an investment property than on their own home when times are tough (though i don't have stats on the current market and that occurrence). lenders are understandably more conservative, however, with all transactions on non-owner occupied properties.
Posted on: 12th Feb, 2010 08:29 pm
Hi Guest,

I agree with what George has said in this regard. It would be quite difficult for you to qualify for a cash out refinance on an investment property.
Posted on: 12th Feb, 2010 11:35 pm
I have first loan $ 320,000 and line of credit $ 355,000 which has been taken by my son 3 years ago and it is on his name. Now I am in process to modify my first loan. After modification of first I know that second going to be my biggest problem, I want to know what are my options about second.
Posted on: 20th Feb, 2010 07:18 pm
As your son has taken the line of credit, you can ask him to negotiate with the lender and apply for a loan modification. Depending upon your son's financial situation, the second lender will let him know whether or not his loan will get modified.
Posted on: 22nd Feb, 2010 01:45 am
OK Niicss, my son's financial situation is very bed. And lets assume that negotiation is not in favor to me. Can he do bankruptcy if value of the house Appraised appx. $420,000-$450,000 and first loan amount is $ 320,000 as I mention earlier, and second is $355,000.
Or if I won't be able to pay monthly payments for second only is there any alternatives in that situation.

Thanks
Posted on: 23rd Feb, 2010 06:17 pm
Your son can file Chapter 13 and get rid of the second loan with the help of lien stripping. As far as the first mortgage is concerned, he will get a repayment plan to pay it off.
Posted on: 24th Feb, 2010 01:34 am
Do you sell any of your 2nd mortgages? I am a buyer
Posted on: 28th Feb, 2010 10:41 am
Are you planning to a second property? Your query is not clear. Please explain.
Posted on: 01st Mar, 2010 12:53 am
Despite the world crisis, we can still purchase our own home with a flexible rate and low interest rate. There is still hope for a bright future.
Posted on: 01st Mar, 2010 06:48 am
We bought our house with cash and have no mortgage can we get some extra cash by adding a mortgage
Posted on: 01st Mar, 2010 04:18 pm
We have a first and second mortgage, set up as 80/20 loan when we bought our home. We are hoping to relocate to another city, but now owe more on our home than what it is worth. The sale of the home would cover all of the first mortgage and likely all but $5000 to $10000 of the second. What happens with the second mortgage? We realize we still owe it and don't want to default, so does this mean we keep paying it, or get a personal loan to cover it so it disappears? Do you know if the 2nd mortgage company also has to be alerted ahead of time so that the amount paid on the loan is paid to principal and not as though we are paying ahead (thus, the interest too)?
Thanks!
Posted on: 01st Mar, 2010 04:34 pm
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