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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

The second mortgage dues won't disappear. You will be liable to pay it off to the lender. You can negotiate with the lender to get a payment plan to pay off the loan. If you are selling off the property, then you will definitely have to inform the second lender about the same.
Posted on: 02nd Mar, 2010 01:40 am
I want to sell my home to upgrade to something bigger how does this work and how do i know what I should be looking for price wise for the new home?
How do I estimate what I would be able to afford after selling.
Posted on: 28th Mar, 2010 11:14 am
You can list your present property in the market in order to sell it off. If you've a mortgage on the property, then you will have to pay it off in full immediately after your property is sold off.

You should look out for a property which you would be able to afford. You can check out the given calculator in order to check out how much you would be able to afford:
http://www.mortgagefit.com/calculators/howmuch-afford.html
Posted on: 29th Mar, 2010 03:32 am
hi jessica

my husband and i are having financial issues and we want to refinance our second home but we can't seem to find a bank that would help us because we don't have great credit. our second home has a large amount of equity but we can seem to touch it..i really do not want to sell it. also, we are renting it out because we can not afford the monthly payments. i was wondering what would you suggest we should do? thank you
Posted on: 01st Apr, 2010 11:23 pm
As you do not have a good credit score, it would be quite difficult for you to qualify for a refinance though you've equity in the property. I would suggest you to improve your credit score first and then apply for a loan.
Posted on: 05th Apr, 2010 03:12 am
What do I need to qualify for a second mortage?

How much down?

Does it matter the Square Footage compared to our first morage?

Do I have to pay all the cost and fees out of my own pocket or can I ask the bank to may some of them?

Is a second mortage different than a investment property loan?
Posted on: 08th Apr, 2010 08:59 am
you need equity in your home for a second mortgage lien to be placed.

i think you're confusing "second mortgage" with "another mortgage" - a second mortgage is literally a second mortgage, after the first, on your home that you reside in currently. it seems like you are asking about a mortgage for a different property - that's a whole different discussion.
Posted on: 08th Apr, 2010 09:41 am
Dear Jessica. My house has first $ 320,000, and second $355,000. The first loan is under the process of Modification (Government Home Protection program). We are 3 months behind on the second mortgage. To day we received a letter from second mortgage bank "Acceleration Warning Notice of Intent to Foreclose" First and second are different landers. Question 1. Can this situation influence negatively to the modification process? 2. After bankruptcy discharged can second mortgage lander foreclose the house. 3. I have not done anything yet on this situation can you please give me advise what to do?
Posted on: 15th May, 2010 01:00 am
Hi Jony!

Welcome to forums!

If the second mortgage lender forecloses the property, then you will be losing it. Thus, in that case, getting a loan modification on first mortgage will not be of any help. After a bankruptcy filing is discharged, the second lender can foreclose the property as he holds lien on the property.

I would suggest you to contact your second lender and apply for a loan modification immediately. Depending upon your situation, the lender will consider your request and let you know whether or not you will qualify for a modification.

Feel free to ask if you've further queries.

Sussane
Posted on: 18th May, 2010 12:13 am
Do you do HEM on Rental Homes?
Posted on: 21st May, 2010 12:29 pm
hi sheila,

this is not a mortgage company. this is a community wherein people discuss their mortgage issues and get suggestions from the expert. if you want a home equity loan, then you will have to contact the local lenders and check out if they can help you with it. you can also speak to the lenders of this community and seek a no obligation free mortgage consultation. this will help you know whether or not you would get a mortgage.

thanks
Posted on: 22nd May, 2010 12:14 am
We would like to consolidate debt from credit cards and a personal loan. We do not have a current mortgage. What is the best way to borrow money using our home equity...a home equity loan, 2nd mortgage, or HELOC? We've found that some lenders will not fund Home equity loans when there is no current mortgage. We have excellent credit.
Thanks.
Posted on: 04th Jun, 2010 02:21 pm
Posted on: 04th Jun, 2010 11:12 pm
Hi Jessica,
I own my home outright, paid cash for it. Can I take a loan against my home? Since I have never had a first mortgage what would this be called and how do I go about applying for one?
Posted on: 16th Jul, 2010 08:24 am
Hi Malia,

As you own your property outright, you'll be able to take out a mortgage on it. You'll be able to take out a first mortgage on it provided you meet the required criteria of the lender.

You will have to shop for the mortgage and apply for pre-approval from the local lenders. The lenders will let you know whether or not you would get a mortgage. They'll also let you know the type of rates and terms you would receive. You should seek a no obligation free mortgage quote from the lenders of this community and check out the type of rates and terms you would receive.

Thanks
Posted on: 17th Jul, 2010 01:24 am
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