What Are Second Mortgages?

Second mortgages used to carry a stigma — they were a sign that you were in financial trouble. But today, the ability to borrow money against your property is considered one of the biggest advantages of owning a home. Second mortgages are essentially loans secured by your home or another piece of property with a first mortgage. The second mortgage allows the homeowner to tap into his or her equity to pay for college tuition, finance essential home improvements, pay off credit card balances, or meet other pressing financial needs.

Because there is more risk involved with a second mortgage, the lender’s conditions are usually more stringent. The term is shorter, and the interest rate is higher than for a first mortgage. In the event of default, the holder of the second mortgage is subordinate to the first.

To qualify for a second mortgage, your credit must be in good standing, and you must be able to document your income. An appraisal will be required on your home to determine the home’s market value.

By definition, a second mortgage is any loan that involves a second lien on the property, but you generally have two options:

  1. Home equity loan
  2. Home equity line of credit

Both options combine your first and second loan, so your loan will be limited to 75 to 80 percent of your home’s appraised value. With a home equity loan, you borrow a lump sum of money to be paid back monthly over a set time frame, much like your first mortgage. However, the closing costs (often 2-3 percent of loan amount) are often higher than your first mortgage, and the rate (usually fixed) is also higher.

A home equity line of credit (HELOC) is an open line of credit tied to an equity-based maximum loan amount. You may use the account for a set period of time (5, 10 or even 20 years) as long as there are funds. Once your pre-determined time period is up, you will be required to pay off the loan, making monthly payments on the principal and interest. The interest rate can fluctuate month to month on a home equity line of credit, which makes this option appealing when interest rates are low, but risky when interest rates increase.

When deciding what type of loan is best for you, it is important to consider how you will use the money and how you intend to pay it off.

  • Do you need money in one lump sum or in intermittent amounts over several months or years?
  • Do you want a fixed interest rate so that you can repay your loan in precise monthly installments?
  • Would you rather have the flexibility to make any size payment above the interest-only minimum?

In today’s competitive market, there are many options available. We can help you find the right mortgage product for your lifestyle and financial needs, so call us at 1-888-848-1880.

M2 Lending Solutions 2000 S Colorado Blvd, Tower One Suite 1-3400 Denver, CO 80222