What Is Second Mortgage? - part 1
by Ajay Pats
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 or less). A second mortgage may require a "balloon" payment at the end of the repayment period. 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 interest rate.
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 change accordingly.
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.
Read the end of
What Is Second Mortgage?
Related Second Mortgage Articles: Understanding A Second Mortgage Refinancing Second Mortgage Bad Credit Second Mortgage By The Numbers Second Mortgage Loans A Second Mortgage Vs. A Home Equity Loan |
Related Second Mortgage Questions: Other resources for Second Mortgage Second mortgage? Second mortgage? Second Mortgage Lender re: Collateral? Cash-Out Refinance or Second Mortgage? If Second Mortgage...home equity loan or HELOC? Second mortgage refi or consolidate 1st and 2nd (UPDATE)? |
Back from Second Mortgage Articles
to California Mortgage Articles Directory