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What is a second mortgage?

A second mortgage is a home loan that uses your home’s equity as collateral. The term “second” refers to the fact that, in the case of a default, the balance on the primary or first mortgage is paid off first before any money goes toward paying the second.

Equity

Equity is the difference between your home’s current value and the total balances of any mortgages. Equity lenders will not lend you the full value of the equity but typically limit the total loan balances to about 80 percent of market value, according to the financial website Bankrate.com.

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Terms

A second is similar to a first mortgage in that the lender loans you a specific amount of money and you repay that amount, plus interest, over time. However, interest rates for second mortgages are typically higher and they generally have more fees than first mortgages. Repayment periods are also shorter on seconds.

Line of Credit

Another type of second is home equity line of credit. Instead of borrowing a lump sum, you get a line of credit much like a credit card. You then access however much money you want or need, going back for more if you like—as long as you stay within the limit.

Reasons to get a second mortgage

The two most common uses are home improvement and debt consolidation. Other popular uses include tuition, medical expenses, living expenses during unemployment and high cost purchases.

Risks

Second mortgages have risks. Just like with a first, you could lose your home to foreclosure. If your home’s value drops, you might end up owing more than it’s worth. And using a second mortgage to pay off debt might make your monthly payments lower but the total cost will probably be higher because of the extended payback period.

Source:

Mortgage 101: Second Mortgage Loan

Bankrate.com: Home Equity

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