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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 Guest,

With a second mortgage, you can borrow on the basis of your present home equity, that is the difference between the current value of your property and the amount you have paid towards the first mortgage. But before considering a second mortgage, you must know that you have to incur the closing costs similar to that of the first mortgage. And you will also have to pay the higher interest rate associated with the second loan. To know more on second mortgage, you may refer to http://www.mortgagefit.com/second-mortgage.html
Posted on: 25th Sep, 2007 12:38 am
I took a second mortgage with my fiance just 5 months ago and since then I'm paying 80% of the monthly payments. My finace quit his job and now he refuses to pay for the loan. But I pay for all the utilities cables and then there's the first loan, though I can still pay for it . Can I sue home for his part of the second loan payments, he said he'll pay half of the second mortgage?
Posted on: 17th Oct, 2007 01:15 am
Hi Remo,

It is totally depends upon you. I think if you can pay it you can pay it until your fiancé starts earning, it is better to negotiate the matter. Otherwise, you can surely sue him for his part of the second loan payments.

Jonny
Posted on: 17th Oct, 2007 02:20 am
Hello Remo,

You can definitely sue him but you have to carry on with the payments before he starts doing it. Otherwise it will affect your credit.
Posted on: 17th Oct, 2007 02:36 am
I bought my first house with 80/10/10 loan. I didn't know that the second mortgage is a balloon loan with lump sum payment after 10 years. How do I pay extra towards the principal each month so that I don't have to make balloon payment after 10 years?
Posted on: 26th Oct, 2007 11:14 pm
Hi Caira,

I think it is difficult to pay off balloon loan with lump sum payment after 10 years. So if you can convert that loan into Adjustable Rate of Mortgage, then it may be helpful for you. You should talk to your lender and convert it to ARM.

Thanks,
Larry
Posted on: 27th Oct, 2007 01:51 am
Hi,

I guess you can make accelerated mortgage payments to pay off the loan early.

You can choose accelerated bi-weekly payments where you make payments every two weeks, making a total of 26 payments in a year.

For all this, you need to talk to your lender first.
Posted on: 27th Oct, 2007 03:43 am
I owe $350,000 on my home that is appraised at $415,000. I am in need of cash to repair windows and bathroom. I bought the house two yrs ago. last year I refinanced and took out $25, 000. Should I refi again to get the cash or should I get a second? Also do oyu pay off the secend concurently with the first or do you start paying the second after the first is paid off?
Posted on: 27th Oct, 2007 08:02 am
Hi Tracy,

Welcome to our community forums.

First of all, let me tell you, if you have refinanced last year itself, then there are less chances of refinancing again within this time gap.

Moreover, you don't seem to have much equity, so getting a cash-refinance loan won't be easier. However, if you would like to check out if a refinance or second mortgage is the right option, you may use the Calculator on Cash-out Refinance vs Second Mortgage. And, if ever you take out a second mortgage, you need to pay it concurrently with the first; if you wait till the first is over, then there'll be a lot of accumulated debt and probably by that time, you lender might foreclose even.

Regards,

Jessica.
Posted on: 29th Oct, 2007 06:13 am
i have 2 mortgages on my home and I wish to transfer the second mortgage to my new home. I have lived in the new home for 4 months and it's getting tough. The equity is too low in the new home. How do I transfer the second loan?
Posted on: 01st Nov, 2007 11:15 pm
Hi Edwards,

It is very tough to transfer the second mortgage from your old home to new home. You have said that the equity of your new home is very low. So it is not possible to take a second mortgage on your new home and pay off the second mortgage of your one. It will be better if you talk to some lenders on this regard.

Thanks,
Larry
Posted on: 02nd Nov, 2007 12:26 am
Hello Edwards,

I don't think it is possible to transfer the mortgage of one property to another.

It is already a written agreement that you have taken a second mortgage against a particular property and keeping that as a collateral against the loan. So, now it is impossible to transfer the same loan to another and change the collateral.

You could have refinanced your new home to pay off the second mortgage but since the equity in the new property is too low you cannot even do that.
Posted on: 02nd Nov, 2007 02:58 am
Would you please advise me the best books on judicial & non Judicial foreclosures(Mortgages)
Also books on how a junior lien holder can protect thier intrests from the senior lien foreclosures.
Posted on: 14th Nov, 2007 11:53 pm
Hello Solomon,

A judicial foreclosure is processed through court when the lender files a complaint and the non-judicial foreclosure is done without the court's intervention.

You will find more information on these at http://www.mortgagefit.com/judicial-foreclosure.html

Apart from this, if you want to do a detailed study you may refer to
" The Foreclosure Handbook - A Basic Guide to Understanding the Foreclosure Process " written by Jeffrey Posner.
Posted on: 15th Nov, 2007 03:19 am
I got approval for a 1st mortgage at fixed rate of interest (7.5%) amd a second loan which is interest-only at 10.5%. this one is for rental property. The second's a heloc. How much will my payments increase on second mtg should I look out for another loan? Should I avoid the interest-only second loan and look for some other option?
Posted on: 24th Nov, 2007 04:08 am
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