What is second mortgage? by
What is a second mortgage?
A second mortgage is a loan that is secured by the home itself, and
subordinate to the first mortgage. Any mortgage taken out against a
home in addition to an already established mortgage automatically
becomes a second mortgage.
As the name implies, second mortgages are secondary to first
mortgages. This means if the homeowner is forced into foreclosure,
the second mortgage holder will receive no proceeds from the sale of
the home until the first mortgage has been completely repaid.
Characteristics of a typical second mortgage:
Since the lender's risk is higher, second mortgage loans carry a
higher interest rate than first mortgage loans.
Second mortgages are typically shorter in duration (usually 15 years
A second mortgage may require a "balloon" payment at the end of the
This one is a biggie: the interest paid on a second mortgage is tax
deductible in most circumstances!
Primary types of second mortgages:
Home equity loan - This is the traditional type of second mortgage.
There is a one-time disbursement of the loan funds (in a single
check) followed by a period of regular monthly payments and a fixed
Home equity loans are often used to consolidate debts, remodel the
home, fund a college education, purchase a big ticket item such as
an RV, or most anything that requires a large amount of cash.
Line of credit - This type of second mortgage is very different from
a home equity loan. With a line of credit, you don't receive a large
check for the full amount up front. You may never even borrow any
actual money from it at all!
The interest and payment on a line of credit second mortgage can and
does change periodically. The interest is typically tied to the
prime rate. The actual interest rate will be the prime rate + a
certain number of percentage points.
For example, your loan specifies that you will pay the prime rate +
5%. If the prime rate is currently 6.5%, the interest rate on your
loan will be 11.5%. The interest rates will be evaluated
periodically, and if the prime rate has changed, your interest rate
will change along with it. Of course your monthly payment will also
A line of credit second mortgage is just that: an amount of money
that you can borrow at a future date as needed. This amount is
available to you all at once or in several small disbursements
spread over many years.
For example, you apply for and get approved for a $50,000 line of
credit (secured by a second mortgage on your home). You can borrow
the entire $50,000 at one time.
Alternatively, you can wait a few months and borrow $20,000 for a
new car. A few months later you can borrow $6,000 to add a room to
your house. Later still, you can borrow another $3,000 to pay off a
credit card bill.
So far you will have borrowed $29,000, meaning that you have $21,000
left on your line of credit that you can borrow later if you need
Second mortgages allow homeowners to tap the equity in their homes
to purchase expensive items, pay of debts, or most anything else.
Home equity loans are usually used to fund a present need while
lines of credit are often established for use at some time in the
It is very important that you use a second mortgage wisely because
if you get into financial trouble you can potentially lose your
home. But if used properly, a second mortgage can help you enjoy a
better lifestyle, now and in the future
About the Author
Ajay Pats is a professional
manager.He manages real estate broking site "Real estate broker"
for home based business entrepreneurs "Venturecon/Home business
opportunities"(http://groups.msn.com/venturecon) and inspirational
ezine "Discover secrets of happy and prosperous life"(http://www.topica.com/lists/venturemall).