A Second Mortgage and Your Home

A Second Mortgage and Your Home
  • Opening Intro -

    A second mortgage is debt that along with your first mortgage must be paid back to satisfy the lien on your home.

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Is a second mortgage right for you?

Homeowners may take out a second mortgage for a variety of reasons including to consolidate debt, pay down medical bills or to fund a home renovation. You can also pay for college, take a trip or fund some other endeavor with the monies borrowed.

Second mortgages are also called home equity loans as the equity that you have in your home is tapped to cover the loan. Equity represents your vested interest in a home. For example, if your home is appraised at $300,000 and you owe $210,000 on your first mortgage, then you have $90,000 in equity in your home. A lender may allow you to borrow a portion of that equity, but not all of it.

Two Choices

Who should you see about obtaining a second mortgage? You have two choices here:

First, your primary or first mortgage holder may allow you to take out a second mortgage. The advantage here is the lender is already familiar with you and may not need all the closing documentation another lender would require.

Second, you can approach any lender that specializes in home equity loans for your second mortgage. The advantage here is that you may be able to secure a lower rate. However, you’ll also pay more in closing costs. Moreover, the holder of a second mortgage has a second lien on your home which means that if you default on your mortgages, the first mortgage holder also has first dibs on your home when foreclosure action is taken. Thus, your interest rate on the second loan will be higher than with the first mortgage.

Cashing Out

If the thought of making two loan payments a month bothers you, you can always refinance your home and take advantage of a “cash out” provision. With this arrangement you have one loan and receive cash to handle your bills. In the case of the home with a $300,000 appraised value and $210,000 in outstanding debt, you may be able to refinance for $250,000, putting $40,000 in your pocket.

When shopping for a second mortgage, you’ll find similar financing arrangements as you would with a first mortgage. You can choose a fixed interest rate loan, a variable rate loan and even a loan with a balloon payment. What you will be able to get, however, depends largely on your personal credit rating and financial strength. The stronger your financial position, the more likely you’ll get approved for a loan and one at a competitive interest rate.

Mortgage Loan Calculator

When shopping for a loan, you’ll want to make good use of a monthly loan calculator to compare rates and find out how what your monthly payment will be. It can be difficult to compare similar loans, but with a loan calculator you can get a precise calculation for your monthly second mortgage payments.

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Categories: Home Financing

About Author

Matthew C. Keegan

Matt Keegan is a freelance writer and editor as well as publisher of "Auto Trends Magazine", an online publication. Matt covers campus, consumer, business and financial topics on various websites and weblogs, and has been published in the "Houston Chronicle", "Sam's Club Magazine" and "Wisconsin Golfer".