Second
Mortgage Loans
A second mortgage means whatever amount borrowed is secured by your property, in second preference, to your first mortgage and it is a secured loan. A
second mortgage loan is made in addition to the first mortgage and normally based on the amount of equity that the borrower has in his home.
There are many loans available and it can be easy to get a second mortgage on your home. The amount that can be borrowed depends on the difference
between the value of the property and the amount of the first mortgage. This is known as the equity on the property. There are two types of second
mortgages and they are the home equity loan and the home equity line of credit.
A Home equity loan is a loan when the borrower uses the equity in his home as assurance. Home equity loans are a lump sum loan with a fixed interest rate
payment. The amount of loan is determined by credit history, income, and the value of the collateral. Consumers with bad or poor credit can get a personal
loan or home equity loan but it can have high interest rates.
A home equity line of credit is used by homeowners who want to borrow against the equity in their home and there are several different types of home
equity lines of credit. The differences are based on the interest rate charged. The home equity line of credit is like a credit card, you get a line of credit to use
when you need it. A line of credit will have a variable interest rate and the homeowner will not know what the interest payment will be. The interest rate on
the loan will vary to the same interest rate as set by the Federal Reserve Board.
As for second mortgage interest rates, there is the fixed rate mortgage and adjustable rate
mortgage (ARM). In a fixed rate mortgage, the interest rate remains fixed for the life of the loan. The borrower does not have to worry about the monthly payments changing
or getting higher. This is a good loan to have when interest rates are low. In a adjustable rate mortgage(ARM), the interest rate may change during the life of the loan.
If you are going to live in your home more than just few years, having a fixed payment can be good. If you plan to stay a short time in your home and are
not worried the monthly payment may change or increase in the future an
adjustable rate mortgage (ARM) may be a good loan option for you too.
Second mortgage interest rates can be higher than a 1st mortgage rate, and the interest paid on the second mortgage may be tax deductible ( ask your tax
person). The interest may be 100% deductible if the combined loan value of the first and second mortgage does not exceed the price of the home.
When more than 80% of the home’s value is borrowed, it can subject the borrower to private mortgage insurance.
If ever you refinance, you will have to pay off the 2nd mortgage. Taking out a second mortgage loan requires the lender to place a lien on the borrower's home. The lien will be recorded in
second position after the first mortgage lender’s lien. Usually loans are for 5, 10 or 15 years which gives the borrower a choice of repayment
options depending on their financial circumstances.
The borrower is free to use the second
mortgage loan as they wish. It could be used to pay debts, make home improvements, pay for college expenses, or
anything. The important thing is make sure payments are paid on time and the loan is paid off as soon as possible as it is a secured loan. If it is not paid and
you default on the loan, you risk losing your home.
