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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 just wandering if you can take out a second mortgage on my home from another country
Posted on: 28th Sep, 2010 03:29 am
hi julz,

if you've equity in your property, then you'll be able to refinance the mortgage and pay off other debts in full. once you pay off the other debts, you will be liable for paying the mortgage on your property only. however, you will have to go for a new appraisal if you wish to refinance your existing mortgage.

to guest,

there are lenders who operate internationally. you need to contact such lenders and apply for mortgage. if you meet their required criteria, you'll be able to get a second mortgage for your property.
Posted on: 30th Sep, 2010 12:07 am
I HAVE A 2ND HOME WITH NO MORTGAGE, ALL EQUITY HOW CAN I TAKE OUT 85% OF THE EQUITY?

Posted on: 05th Oct, 2010 07:22 pm
Hi SPENCE,

If you don't have any other mortgage, then you can contact the local lenders and apply for a mortgage using the second home as a collateral. However, if there is a mortgage on one of your properties, then it will be difficult for you to get a mortgage. Moreover, if you take out a 85% of the equity, then you'll have to go for a private mortgage insurance (PMI).

Thanks
Posted on: 06th Oct, 2010 01:57 am
If you have a both mortgages on a home and sell the home. I am very aware that the 1st mortgage must get paid off, but what about the 2nd? Is it the bank's responsibility to pay off the mortgage or the home owner? The reason I ask is my mother sold her house and with the 2nd loan had given me money, I thought that by selling the house the mortgages would be paid. It paid off her 1st mortgage but not her 2nd right away and she can still make the payments. Is this cause she asked to continue making the payments or the bank just isn't aware that the house was sold? I'm not currently talking to my mom so if anyone can help I would appreciate it. Thank you!
Posted on: 14th Nov, 2010 05:24 pm
First you have to make sure that the loan she recieved was a second mortgage and not a personal loan. I find it very hard to believe that She would be able to seel the home with a mortgage attached to it. When a new purchaser buys a home a title search must be done to assure the buyer that their are no liens attached to the house. So it is possible that she recived a personal loan and not one attached to the house.
Hopefully what she sold the house for is greater than what she owed and she can just go ahead and pay off the loan. Look at the HUD1 it is a paper that she would have recieved at closing that detils where all the money goes.
Posted on: 15th Nov, 2010 10:51 am
i'm paying cash on a short sale house in florida because of time restraints but would like to get a mortgage on it to free up my cash what are my options
Posted on: 25th Nov, 2010 03:20 pm
Hi larrycc,

You will have to contact the local lenders and start applying for loans. If you meet the required criteria of the lender, then you'll get a mortgage. You should have a good credit score, stable financial situation and the required debt to income ratio in order to get the mortgage.

Thanks
Posted on: 25th Nov, 2010 07:37 pm
We have a FHA Loan owing 181,000; due to realestatel market being so low our home is worth about 140,000, we need to do some fixings to the house, what are our chances of obtaining a second mortgage loan or HELOC loan
Posted on: 02nd Dec, 2010 08:00 am
Welcome idhelp,

As you don't have equity in your property, you won't be able to qualify for a second mortgage or HELOC.
Posted on: 02nd Dec, 2010 11:11 pm
I have 2 mortgages and I apply for a government home loan modification. I was aproved for the first loan but the second loan was not included in the modification. The thing is that I couldn't keep up with the payments on that second loan and they told me that second loan is now a cash off account. It show in my credit report as a cash off accout what that means? I have tried to contact the bank but they said they can't find that account. What could have happened to that account?
Posted on: 06th Dec, 2010 04:21 pm
Hi monika!

Welcome to forums!

I guess the lender has charged off the account and sold it off to a collection agency. The CA will in turn collect the dues from you. As it is mentioned on your credit, it will lower your scores by some points.

Feel free to ask if you've further queries.

Sussane
Posted on: 06th Dec, 2010 10:14 pm
You can contact the area with other donors and ask for a loan. However, if no property, you can not refinance the loan to reduce interest rates.
Posted on: 14th Feb, 2011 07:49 am
I have a reverse mortgage on my home,now I have bills that I need to pay off,can I get a second mortgage on the same home?
Posted on: 01st Sep, 2011 10:50 am
Hi rumrmmy,

As there is a reverse mortgage on the property, there won't be any equity in it. In such a situation, you won't be able to qualify for a second mortgage.

Thanks
Posted on: 01st Sep, 2011 09:17 pm
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