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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 had purchased property under the gnnd program, now the 3 yr occupancy period is coming close to be over, will the hud's second mortgage be released now?
Posted on: 07th Jun, 2007 05:10 pm
Hi Molly,

As the 3 year occupancy period is going to end, HUD's second mortgage will be released if you:

  • As a participant to the program have completed & returned all the required annual certifications,

  • Are currently not under investigation by the Office of Inspector General (IOG) and

  • Are in compliance with all Good Neighbor Next Door (GNND) regulations.


If all these conditions are met then a mortgage satisfaction will be filed with your county recorder's office and a copy will be mailed to you. This release will be mailed to the county recorder's office with 30 days of the end of the occupancy period.
Posted on: 07th Jun, 2007 05:38 pm
if you want to take out a second mortgage on your home, could you use both husband and wives income even if the house is only in in the husbands name or do you have to put the house in both names to use both incomes.
Posted on: 14th Jun, 2007 02:22 pm
Hi Guest,

Welcome to Mortgagefit forum.

For taking a second mortgage the house should be in both names if they need to take the loan jointly.

The house works as a collateral for the mortgage so lender would require all named on the mortgage to have ownership rights over the house on which the loan is been taken.

Colin
Posted on: 14th Jun, 2007 02:37 pm
how/where can I check to know if a mortgage company is licensed with dept of banking to give second mortgages in connecticut
Posted on: 20th Jun, 2007 06:06 pm
Jeanty Connecticut Department of Banking posts licenses of mortgage companies providing second mortgages on their website. You can view the list from here - http://www.ct.gov/dob/cwp/view.asp?a=2233&q=297866&dobNAV_GID=1663

You can also check the status of any company's license if it is not listed on that above page by calling (860) 240-8200.

Miller
Posted on: 20th Jun, 2007 06:11 pm
I have sold off my property a few yrs ago with the help of realtor. In order to make the deal work, I agreed to take up the liability of paying for a second mortgage for $15,000. The buyer has fallen behind on the first loan as a result of which the lender foreclosed. And then there were late fees and interest charges which is why he had no money to recover what he owes me. What i wish to know is the buyer is still responsible to pay me and if he not doing so, can I file a case in small claims court? The property is in California.
Posted on: 29th Jun, 2007 04:27 am
Hi Veronica,

Welcome to the forum.

If the buyer has signed on a written agreement stating that he will be paying for the second note, then he will be still liable to pay you what he owes. In that case, you can file a case in the small claims court.

Thanks
Posted on: 29th Jun, 2007 04:41 am
It's ok if you want to file a case against the buyer, but then just keep in mind that there’s always a limit up to which you can sue a person in the small claims court. In California, it's around $5000. In cases beyond the limit, you will have to go to the usual court.
Posted on: 29th Jun, 2007 04:45 am
My house is paid for and thinking of buying a second home that can only be bought with cash because it is not up to HUD standards. Is this smart to take 2nd mortgage on this my kid will be residing permenantly in second home?
Posted on: 21st Jul, 2007 12:25 pm
"My house is paid for and thinking of buying a second home that can only be bought with cash because it is not up to HUD standards. Is this smart to take 2nd mortgage on this my kid will be residing permenantly in second home?"

Jennifer,

As the house is paid off you can take a mortgage on this house and this will be considered as a new loan and not a second mortgage.

Miller
Posted on: 21st Jul, 2007 06:33 pm
are 2nd mortgages available for property which is rental or investment?
Posted on: 26th Jul, 2007 07:03 pm
Yes you can get a 2nd mortgage for non owner occupied property such as rental or investment property. But for such loans the rates charged are going to be higher than what are charged for oo properties. Some lenders may also require the borrower to have 20 percent equity remaining after the 2nd is taken.

Miller
Posted on: 26th Jul, 2007 07:08 pm
i want to compare if a cash out refinance or taking a second mortgage will be good for me, is there any calculator which i can use to make out the advantage i would get by selecting one of the two options?thanks for the help
Posted on: 04th Aug, 2007 08:20 pm
Hi Nancy,

You can use the calculator listed on this page to determine which option will be better for you, a second mortgage or a cash out refinance of your existing mortgage - http://www.mortgagefit.com/calculators/cashoutrefinance-secondloan.html

Using this calculator you will also be able to know which option will provide you maximum savings & higher cost offset.
Posted on: 04th Aug, 2007 08:24 pm
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