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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

How long is it before you can pull out equity after you've bought a home? I wanted to pay off some cc debts so that I could start afresh .
Posted on: 28th Apr, 2008 09:33 pm
Hi jack,

Welcome to the forum.

You can refinance the mortgage even after one year. But pull out you equity you need to see have much equity have you gained yet.

Best of luck,
Posted on: 29th Apr, 2008 02:36 am
My home is worth 90k with 65K due on my first mortgage along with a 50k on the second. We are planning to file chapter 7 and want to keep the home, is there any way I can default on the second without losing the home?
Posted on: 08th May, 2008 03:59 am
Welcome Rhonda.

If you want to keep the home then I should suggest you to file chapter 13. If you file chapter 7 then you may loose the home. Under chapter 7 your home is not a exempt property then it will be sold to pay off the lender?

So before filing chapter 7 consults with a bankruptcy attorney.

Know more about chapter 7 at

Let me know if you have any further query.
Posted on: 08th May, 2008 04:17 am
Bank provides the borrower with a line of credit for a period and the borrower can keep drawing money against the balance available in line.. Is it second mortgage loan?
Posted on: 26th May, 2008 03:40 am
Hi Reman,

Welcome to the forum.

If the borrower is getting the line of credit by using his home equity as collateral then it is Home Equity Line of Credit which is a kind of second mortgage. But you can even get a Personal Line-of-Credit Loan which is an unsecured loan.

Best of luck,
Posted on: 26th May, 2008 03:59 am
I am in a very frustrating situation...I need to re-finance my home or get a second mortgage. I paid about 90K for it but nothing is going for less than 185K in the area. I owe 55K, but I have horrible credit between an IRS tax lien for 11k (maybe more) and a judgement for 4k from a credit card company. Again, horrible. I want to refi or get a second mortgage to pay off my debt to them and all parties and really start over the right way, but I feel locked into this frustrating situation -- like no one can help with a situation like unless it is predatory! It's like I have a value of over 100K and it means absolutely nothing? Are there any professionals who deal specifically with a situation like this? What would their name be, a mortgage broker, financial advisor...? I am will to pay a professional to hands on technical help, but don't want to be bothered with predators. Any advice? Any companies who you know are reputable who can help walk me through this situation? And how long such a process would take?
Posted on: 26th Jul, 2008 09:59 pm
hi guest,

welcome to our community forums.

i think $55k is the balance that you owe. but what's $185? is it the sale price of properties in your area? please clarify.

you've said you owe a tax lien worth $11k and it can be even more than that. it's better to know exactly how much you owe. moreover, have you thought of paying off the judgment amount? i guess it will be tough for you since you have to pay for the mortgage too.

how much of equity do you have? if possible, you can take a cash-out refinance loan and include the judgment and tax lien amount with the cash-out loan. but you need to check out the rates then. the rate shouldn't exceed the one at which you're paying. otherwise what's the benefit of going for the refinance?
Posted on: 28th Jul, 2008 04:09 am
i am going to do const.-perm finance the pre apprassial on the home is 165,000.00 the lender is loaning 90 per home is only going to cost 148,000.00. do i need a down payment .
Posted on: 28th Jul, 2008 07:52 am
Hi Billy,

Welcome to our forums.

It's always a good decision to make a down payment on the purchase price. It helps you borrow less and hence you don't need to pay more as the monthly mortgage payment. Do you have excellent credit and how's your income? Even though you're getting the loan at 90% ltv, it's better to make a down payment and reduce the loan amount.

Good luck
Posted on: 29th Jul, 2008 03:18 am
I am looking for a second mortgage to pay off some debts and make home improvements. Does anybody know who will do this for a mobile home that is 16 years old with alot of updating and extras? There is a covered front and back porch, 3 car car port, addition, fresh paint, new flooring, etc.
Posted on: 10th Sep, 2008 11:23 am
Hi guest,

If you are looking to purchase and do repair work on the mobile home, then FHA 203K mobile home loan would be the right option for you.

However, there are other options as well. I suggest that you go for a no-obligation free loan consultation on the right mortgage with the lenders in this community. Hopefully they can help you to decide upon the loan option that'll suit you better.

May god bless you.

Posted on: 11th Sep, 2008 12:42 pm
We have $417,000 at 5.625 on 30 year fixed but a variable rate 2nd line with a balance of $195,000 the value of the home apprasied between $730K and $750K. What are our options to lock the 2nd?
Posted on: 12th Sep, 2008 07:16 pm
Welcome newuser.

Are you trying to refinance the second mortgage? I think a combined refinance loan including both the first mortgage and second line of credit would help you better.

Posted on: 13th Sep, 2008 01:03 am

Check your paperwork on the second mortgage to see if you have a lock option. Most banks do not offer this but some do so do this first. If they do not, then you might be better off leaving it as an adjustable for now. Fixed second mortgage rates are pretty high right now. Your looking at 9% fixed even with good credit. I would bet that with the adjustable rate you currently have that it can't be much higher than 6%.

If you just hate having the second mortgage adjustable rate, you could look at combining the first and second into a new first mortgage at a fixed rate which would be slightly higher than what you have now.
Posted on: 17th Sep, 2008 12:08 am
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