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Second Mortgages Typically Require Established Home Equity Staff - Mortgage Lenders Plus.com

A second mortgage is a loan taken out on a home where the owner has established equity in the house, either through appreciation or through paying down the primary mortgage principal or both. A second mortgage is money borrowed with that equity as collateral and is also known as a “home equity” loan. Generally these loans are for a shorter period of time than the primary mortgage – five, ten, fifteen or sometimes twenty years.

The interest rate on a second mortgage will generally be higher than what the market is currently making available for the larger, first mortgages for thirty year terms. Usually a second mortgage provided to a borrower with good credit will be 2 to 2 ½ percentage points above the primary mortgage rate. Second mortgages tend to be provided at fixed rates, although many institutions are now offering the option of adjustable rate loans as well.

The reason for the higher interest rate is twofold: first, the second mortgage is for a shorter period than the first mortgage; and second, because the second mortgage is subordinate to the first. What this means is that the lender on the second mortgage also has a second-priority claim against a property in the event that the borrower defaults. The lender who holds the second mortgage gets paid only after the lender holding the first mortgage is paid.

Second mortgages are for the purpose of converting your equity in the home into capital. You can also accomplish this through a home equity line of credit (HELOC). A HELOC is not a lump sum payment, as with a mortgage, but rather a credit line on which you can draw down when you need the cash. You make payments only against the amount you have drawn down; if functions like a credit card, while a second mortgage is a single payment and you are making payments on the entire amount.

Some people confuse second mortgages with the process of taking out a new mortgage to replace your old one. This process can result in excess cash as well, but it is called “cash-out” refinancing and is really replacing your original first mortgage with another first mortgage. A second mortgage is just that: a second loan on which you must make monthly payments.

Loan origination costs and fees will accompany the second mortgage in similar fashion to the first mortgage, although some fees such as title search and escrow won’t be necessary. Nevertheless, there will be substantial costs to obtaining a second mortgage, even though it’s one of the cheaper loans available to the consumer, in terms of interest.