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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 just got my first home back in 2008. I would like to take out a second mortgage to pay off my student loans and some credit cards. Do I have enough equity built up to do this since my purchase is so new?
Posted on: 27th Jul, 2010 08:20 am
In order to get a second mortgage on your property, you should have equity in it. Unless you've 20% equity in your property, you won't be able to qualify for a second mortgage.
Posted on: 28th Jul, 2010 02:33 am
What a great resource!
Posted on: 02nd Aug, 2010 08:42 am
I own a home that I owe roughly 235,000 on. It has as estimated market value of between 270-280 thousand dollars. I currently have about 35,000 in unsecured debt and would like to pay it off. Would there possibly be a second mortgage that would help me?
Posted on: 15th Aug, 2010 12:44 pm
welcome bigboy,

rather than taking out a second mortgage, you can go for a cash out refinance. this will help you in cashing in the equity that you have in your property which can be used to pay off the unsecured debt. if you take out a second mortgage, you would be liable for paying two mortgages every month. considering that, it would be a better option to refinance the loan.
Posted on: 16th Aug, 2010 12:13 am
Madam, i have one house on 2005 with a loan of rs. 10.50 lakhs, now outstanding of the loan is rs.9.50
Now, i am looking for second home for that rs.12lakhs sanction should i go
for second home or should i clear first one
Posted on: 22nd Aug, 2010 07:27 am
Hi pravin,

It would be better if you could pay off the first mortgage prior to taking out the second loan for a new property.
Posted on: 23rd Aug, 2010 12:23 am
Our mortgage is 105,000 at 9.25% interest (bought in 2005 with no jobs hence higher mortgage, and house has no value) We don't live in the home atm (is vacant) and would love to fix it up and sell it. I went to my bank to refinance and they told me that they don't finance on homes that need fixing up. It needs a new roof, siding, etc. How do I find a loan that will refinance to get my interest lower and pull money out to remodel the house?
Posted on: 24th Aug, 2010 11:42 am
Hi Jennifer!

Welcome to forums!

You can contact the other lenders of your area and apply for a loan. However, if you don't have any equity in your property, you won't be able to refinance the loan to lower your interest rates.

Feel free to ask if you've further queries.

Sussane
Posted on: 26th Aug, 2010 12:05 am
I am trying to refi (30yrs w 10k cash out) to repair & remodel a bathroom & lower my payment. Currently owe 83,800. My payment would drop from 885 to 661. My appraisal came in less than expected. Now my mtg co says I have to pay upfront PMI because the LTV is 83%. This is deducted from the 10k leaving me only $8,375. Other closing costs = $4,700 + $1,339 prepaids/escrow + 400 pd for lousy appraisal. Am I really paying over 6k to get only 8k???? I have no other means of getting the cash I need and probably not enough equity to get a 2nd mtg. What do you suggest? I haven't agreed to new terms yet. THANK YOU!
Posted on: 27th Aug, 2010 08:40 pm
The closing costs may vary from one state to another. As you haven't agreed to the terms and conditions of the lender, you should speak to few other other lenders of your area and check out what type of rates and terms you might receive from them.
Posted on: 28th Aug, 2010 12:13 am
HELLO JESSICA, I HAVE A HOME WITH APPRAISE FOR 134,000, THEIR IS NO LOAN ON THIS PROPERTY, SHOULD I NOT BE ABLE TO TAKE OUT THE EQUITY ON THIS PROPERTY?
Posted on: 17th Sep, 2010 12:09 pm
Hi CHARLES,

As there is no mortgage on the property, if you meet the required criteria of the lenders, you will be able to get a mortgage using that property as a collateral.

Thanks
Posted on: 20th Sep, 2010 12:55 am
Second mortgage is the best way to get paid for their home equity. You could spend lots of money, but can not use it through credit cards or otherwise. Second Mortgage can help meet demand. This is nothing but a loan against their house, where there is already a primary mortgage, it is also a way to cash equity in your home.
Posted on: 24th Sep, 2010 09:12 pm
I owe approx 9000 on my home plus 10000 in credit cards and some high interest student loans. Is it possible to take out a loan to pay all that off using my house so I only have one payment instead of several? Also I recently had my home appraised, could I use that appraisal or would I have to still pay for another?
Posted on: 28th Sep, 2010 12:34 am
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