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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

what is a silent second mortgage? is it a fraud?
Posted on: 10th Aug, 2007 07:02 pm
It is one of the common mortgage frauds.

In this mortgage fraud scheme, the buyer takes/borrows the amount for down payment from seller by way of a non disclosed second mortgage. The lender thinks that borrower has brought his own money for making the down payment while actually the amount has been borrowed.

Further, this type of second mortgage is not recorded to conceal its status.

There are many other types of mortgage fraud schemes that you should be aware of. Please go through these two pages for more information about frauds to avoid falling prey to:

http://www.fbi.gov/publications/financial/fcs_report052005/fcs_report052005.htm#d1

http://www.realtor.org/rmomag.nsf/pages/BEvans200511212

Miller
Posted on: 10th Aug, 2007 07:13 pm
yeh silent second is a fraud. You can know more about it at http://www.mortgagefit.com/know-how/silentsecond.html .
Posted on: 13th Aug, 2007 02:45 am
I wanted to know which type of second mortgages are regulated as per UCCC. I searched through various sites but could not find any information on it. If any one can help, it would be great, thanks, btw, I am in Colorado.
Posted on: 18th Aug, 2007 07:36 pm
James, Uniform Commercial Credit Code (UCCC) regulates 2nd mortgages which exceed the 12 percent per year annual percentage rate (apr) established in statute. And if the APR is below 12% then it does not fall under jurisdiction of UCCC.

For more information on this topic you can go through this following page: Colorado Department Of Regulatory Agencies, Office Of Policy And Research
Posted on: 18th Aug, 2007 07:46 pm
hi james,

the uniform consumer credit code (uccc) provides the borrower with consumer protection rights on certain loans. the second mortgages and home equity loans are subject to the uccc regulations if the annual percentage rate (apr) on a variable loan goes beyond 12%.

but first mortgages and refinance loans are not included under the uccc regulations.
Posted on: 20th Aug, 2007 01:44 am
I'd advise against getting a secong mortgage unless you can absolutely afford to pay on one. I took out a 2nd mortgage for the sake of my business and yeah, pretty much all the money I've made went paying on 2 mortgages plus a few credit cards that stemmed from my past. It just makes a real ugly mess especially when your single.
Posted on: 22nd Aug, 2007 02:54 pm
Thanks Wildstorm for sharing information about your situation. So have you tried refinancing as an option? If making payments is becoming difficult then you need to look at options open for you.
Posted on: 22nd Aug, 2007 05:04 pm
Wildstorm,

I agree with you that unless one is able to pay off the first mortgage, he should not think of taking the second mortgage as the rates for the second loan is quite higher to bear.
Posted on: 23rd Aug, 2007 09:50 pm
does it make sense for the seller to take back a second mortgage while selling the house?
Posted on: 24th Aug, 2007 07:10 pm
Many sellers take back second mortgages from buyer so that the sale of their home gets easy. And hopefully be able to get a better price for the house.

But it is risky to take back a second mortgage.

One has to estimate the benefit from increase in price to the risk of suffering loss in the transaction.

We can take an example to look at it:

As a seller if you can raise the house price from $400,000 to $410,000 by providing a 15 yr second mortgage of $20,000 for a rate of 10% & if appraisal comes to at least $410,000 then the ratio is 50% (ratio of increase in sales price to risk of loss, which is measured by the size of the second mortgage).

This would be a very good investment if the buyer repays according to the schedule. But if he doesn't then the seller would be losing out up to $10,000 (Total loss of $20,000 less the increase in price of the house $10,000). Sellers need to consider how much risk is involved in the transaction and if it would be profitable to take the risk.
Posted on: 24th Aug, 2007 07:23 pm
I have received loan options of two mortgages, first mortgage for 6.5 for 80% of home's value and a second mortgage for 10%. The second mortgage can be a frm for 10.25 rate or at the prime rate but adjustable. which option should I select?
Posted on: 01st Sep, 2007 07:27 pm
Hi Taffrey,

Presently the prime rate is below what you have been offered on the fixed second. But you have risk with taking the adjustable loan also.

You can take the adjustable rate option at prime rate for 15 years & make payments which would be if you had taken the fixed rate loan of 10.25%.

Doing this you will be able to pay off the 2nd mortgage early, thus reducing the risk of facing problems if rates go up sharply in future.
Posted on: 01st Sep, 2007 07:32 pm
Hi Tafffrey,

I personally feel that if the first loan is an FRM, it will be better if you go with it as you will be able to manage the payments better. If the second loan is an ARM, you may find it difficult to cope with the fluctuating rates and and as a result may face problem in repaying them.
Posted on: 02nd Sep, 2007 10:09 pm
i owe 80,000 on an equity loan because i bought my house for a $1, but my assest value is 95,000. i have good credit (810 score) and i would like to take an aditional 75,000 for home inprovements. i make enough for the extra but how do i go about getting it?
Posted on: 24th Sep, 2007 06:47 am
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