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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 did a search on the matter and found the majority of persons will consent with your blog.
Posted on: 13th Jun, 2012 11:58 pm
Thanks!! :)
Posted on: 15th Jun, 2012 12:25 am
I filed for bankruptcy in 2010 and got a discharged after my mortgage company filed for foreclosure. I got the discharge before the company foreclosed. Few months later I called the county to see if the house had been put up for sale. They told me that the foreclosure didnt go through, that the mortgage company didnt go through with it. A month or so later I found out the the mortgage company had sold the houst to another lender. They started sending me bills. I called them to tell them that the house was filed and discharged through bankruptcy. They wanted me to send them the discharge paperes which I did. They put the house for foreclosure for the second time now but Im still getting bills from the house even though I have been out of the house since 2010. Any advice? Is the house still mine?
Posted on: 04th Mar, 2013 05:57 pm
Welcome Cherie,

Unless the property is sold off at the foreclosure auction, you will be liable for the maintenance of the property. However, you won't have to pay any mortgage payments. This is mainly because your bankruptcy has been discharged in your bankruptcy filing.
Posted on: 06th Mar, 2013 09:10 pm
I would like to borrow around $5,000 to 6,000 from my equity.
Posted on: 17th Mar, 2013 08:23 pm
hi susan,

you should contact the local lenders and either apply for a home equity loan or go for a mortgage refinance. these options will help you in cashing out the equity that you have in your property.

thanks
Posted on: 18th Mar, 2013 12:45 am
Dear Author, we intend on keeping the house but we had unfortunate circumstances that made us take second mortgage at %7.95 which comes to $511 monthly payment in addition to our main one. Is there a way to reduce the monthly payment by reducing interest. Thank you. anna
Posted on: 03rd Jun, 2013 10:32 am
hi zemlyanika!

welcome to the forums!

you can refinance both the loans into one single loan at a lower mortgage interest rate.

feel free to ask if you've further queries.

sussane
Posted on: 03rd Jun, 2013 10:29 pm
Generally a 2nd mortgage loan is taken against your home in addition to your primary and large, first mortgage.They are of 2 types home equity loan,HELOC.The interest rates on this type of mortgages are more than that of the first mortgage.
Posted on: 07th Jun, 2013 03:34 am
I live in Pitts. PA and inquiring if we can get a line of credit on our manufactured home. It is paid off.

Just let me know.
Posted on: 10th Oct, 2013 05:20 am
Hi kathy,

As the property is free and clear, you will be able to get a line of credit on it. You should get in touch with the real estate attorney and take his opinion in this regard.

Thanks
Posted on: 14th Oct, 2013 11:14 pm
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