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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

Hello Addison,

The interest seems a bit higher. Are you facing problem to pay the second mortgage? You can refinance with a FHA loan and combine the two loans into one. Thus you can get lower interest rate and reduce your interest rate.
Posted on: 24th Nov, 2007 05:59 am
My home is paid for. I would like to borrow against my equity at less than 80% loan to value ratio for renovations and investment purposes. I want to get tax deduction benefits from the loan proceeds. Will I eligible for a first mortgage or should I take second mortgages at higher rates of interest?
Posted on: 11th Dec, 2007 01:01 am
hello adrienne,

the loan proceeds are neither taxable nor tax deductible. you will get tax deduction benefits on the interest that you pay.

if you don't have a first mortgage, then a home equity loan will not be a second mortgage as it will be the only loan against your property.

usually the rate of interest for a home equity loan should have a low interest rate if there's no first mortgage in front of it and the closing costs are also lower than it. but the interest rates are a little higher than the conventional first mortgage and you have to face that even if you have a good credit.
Posted on: 11th Dec, 2007 04:10 am
My husband and I have gotten stuck with an ARM that will adjust in 09. With our remaining balance on our loan almost equal to what the house appraised for in 06, how can we get into a fixed rate mortgage?
Posted on: 07th Jan, 2008 01:09 pm
hi,

i think you can refinance to change the mortgage from arm to frm. you can ask your lender and if he doesn't agree to do that you can shop a bit for lenders

best of luck,
larry
Posted on: 07th Jan, 2008 01:18 pm
hi adrienne,

any mortgage on a free and clear home will be a first mortgage. this just represents the lien position they will have. i would not suggest going with a line of credit or home equity loan since those typically have higher rates. i would go with a fixed rate mortgage since they are at 5.5% on a 30 year and close to 4.875% on a 15 year fixed right now.
Posted on: 13th Jan, 2008 08:39 pm
Hi God'schild

There are many programs that will allow you to get into a low fixed rate and go up to 95% of the value of your home. I wouldn't wait on this since interest rates are very good right now. You can get into a 30 year fixed rate mortgage at about 5.50% up to 95% with good credit.
Posted on: 13th Jan, 2008 08:42 pm
Hi Addison,

Definately look into refinancing those properties. Those rates do seem pretty high and it seems you can do much better than that. I think you just need to check out a few different lenders to see if this is the case.
Posted on: 13th Jan, 2008 08:44 pm
My father owes $50,000 to a bank. He also owes $10,000 to a bank that has given him home equity line of credit. I've heard from a friend of mine that even if one files bankruptcy, the credit doesn't go away. He also said we'll lose the home. This worries me a lot. If we file chapter 7, should the home equity line of credit be discharged as well the other debt?
Posted on: 09th Feb, 2008 04:54 am
Hi Aries,

Welcome to the forum.

First of all your father will have to qualify to file bankruptcy 7. And if your father files the BK 7 then it will ruin his credit and will remain for almost 10 years.

You will be allowed to keep some exempt properties but other assets will be sold to repay the creditors.

Best of luck,
Larry
Posted on: 09th Feb, 2008 11:13 am
My wife lost her job & will be taking alower paying job.i need to consloidate my bills.
Posted on: 20th Feb, 2008 10:51 am
Hi Ron,

There are several factors that I would need to take a look at to determine which options would work best for you. Such as home value, mortgage balances owed, credit, income, etc.
Posted on: 20th Feb, 2008 09:14 pm
You need to sit down and figure out how to cut your household spending first off, is there a way to make the bills with out taking out a loan? Can you cut corners on unnecessary spending to cut the amount of the loan back. If you have to take out a loan, you will want it to be for as little as possible, since there is only one income, the lending institution will take this into consideration also when lending you money. Will she get a job soon? sit down, write everything out on paper to see where you really are then you can make a plan from there. goodluck
Posted on: 03rd Mar, 2008 03:36 am
i have at contruction loan them sss,, to a residential loan just 6 months a go
i want to take at 2nd morgate on the house cant i do that
Posted on: 10th Mar, 2008 11:03 pm
Hi Bermudez,

Welcome to the forum.

I think what you're trying to say here is, you have earlier taken a construction loan from the Social Security Real Estate department and perhaps refinanced it into a permanent loan just 6 months ago. Is that so? And now you wish to go for a second loan on your home. I think that's pretty possible if you have sufficient equity and your financial situation is sound enough.

Please let me know if I could understand your query or else do not hesitate to discuss further.

God bless you.

Samantha
Posted on: 11th Mar, 2008 12:28 am
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