All about second mortgage

What is second mortgage?

It is a loan taken against your home on which there exists a primary mortgage. The home equity is used as collateral for the second loan.

The second mortgage has less priority compared to the first on the same property. So, if you default, you need to clear your first loan prior to paying off the outstanding balance on the second loan.


When do you choose a second mortgage?

There are situations when you may cash out on your home equity by taking out a second mortgage.
You may have accumulated a large amount of debt through auto loans, balances on high interest credit cards and other bills (medical costs, kid's tuition fees etc) and need to pay them off.

There may be an opportunity for you to invest cash in a business. You can then use a second loan to go for it. But check out if the rate of return on your investment is higher than the second mortgage rate. Only then it will turn out to be a profitable venture.

You may plan to avoid paying private mortgage insurance. But this is possible only when you get a second loan that makes up for 20% of the home purchase price.

You may wish to repay debts and eliminate judgments, pay for your car, purchase a vacation property or plan for a vacation. You can obtain the required cash by taking out a second loan.

How much can you borrow?

A second home loan allows you to borrow on the basis of your home equity. The equity is the difference between the current appraised value of your home and the amount you have paid towards the first mortgage.

With most lenders, you can take a second loan such that the total loan-to-value ratio of your first and second loan is equal to 85% of the home's appraised value. However, there are lenders in almost all states excepting Texas and West Virginia who allow you to take out second mortgages equal to 125% of the appraised value.


What are the possible rates, terms and options?

The interest rates on a second loan are higher to that of the first loan. This is primarily because if you default, you will be paying off the first loan prior to that of the second and as such there is a risk involved in offering second mortgages.

However, you may choose either a fixed rate home equity loan or an adjustable rate home equity line of credit as your second home loan option. The lender will quote you a rate depending upon your credit score, total loan to value ratio and the current market trends. The loan term will vary from 15 to 30 years depending upon the option you choose. But in general, a second loan is offered over a shorter time period compared to a first loan.

How do you get a second mortgage loan?

Getting a second mortgage is similar to taking out a first mortgage on your home. You need to shop for a suitable loan offer by approaching different lenders and getting quotes from them. You can simply fill out a no-obligation free short form to get quotes from the community ranked lenders. Then you should compare the quotes, find out the offer that can cost you less in comparison and provide all necessary paperwork while you apply for the loan. The lender will conduct an appraisal on your home in order to determine its current value and complete all the steps that are necessary to complete the loan processing so that he can arrange for the closing. At closing, you will be signing the note and other documents as required by your lender. You will have to pay closing costs similar to that of your primary loan.

What happens to the second mortgage if you refinance the first?

When you refinance the first loan after getting the second mortgage loan, you should request your lender for a subordination of the second loan. This implies that your second home loan will be considered as a junior lien compared to that of the refinance loan. Otherwise, if you do not subordinate it, the second mortgage will be taken as the first lien and the refinance loan will take over the second lien position. In this case, there will be less risk with the second loan but higher risk involved with the refinance as a result of which the first mortgage refinance will cost you more in interest charges.

With a second home loan, you get the chance to tap a large sum of money. Moreover, you can deduct the interest on your taxes up to a certain limit. But you cannot overlook the costs and the high interest rate associated with a second loan. Besides, if you default on the second loan, you may lose your home. Therefore, prior to going for a second mortgage, it is best to prepare a budget and find out how much you can afford to pay in addition to the first loan.