Second Mortgage is a home loan taken against home equity that is kept as collateral for the loan. It carries rights subordinate to those of the first mortgage. This implies that if the property is under foreclosure, the first mortgage must be fully paid off before the second mortgage holder is to be paid.
For example, Harry took a mortgage of $400,000 on his home a few years ago. He still has to pay back $150,000. Now he takes another mortgage based on his home equity, that is, $250,000 ($400,000 -$150,000 = $250,000). This home loan is a second mortgage on the same property.
- Second mortgage home loan are offered as home equity loan or home equity line of credit. Home equity loan is offered as a single lump sum amount. But with a home equity line of credit, one can avail cash advances up to a maximum credit limit within the loan period.
- Second mortgages charge higher interest rates than first mortgages, as there is greater risk involved in offering them. Your home equity and credit score determine the rate of interest charged on the second mortgage.
- The loan period varies from 15 to 30 years. However, in a home equity line of credit, you can withdraw cash advances within the first 10-15 years. Then, you should start repaying the loan so that you can pay off the second mortgage within the remaining loan term.
- Home equity loans have fixed rates and terms whereas home equity lines of credit are adjustable rate mortgages (usually tied to the prime rate index) in which interest rates remain fixed for an initial period, after which they fluctuate periodically.
- The interest on second mortgage is typically tax deductible; hence it offers tax relief to some extent.
- Second mortgage loans help to convert home equity into cash that can be utilized for home improvements, educational purposes etc.
- It helps to consolidate unsecured debts of high interest rates and mortgage loan so that total monthly payment on the debts is reduced.
- The loan amounts of these home loans are less than those of first mortgages. So their chances of approval are higher.
- A second mortgage worth 10% of the property value along with a first mortgage for 80% of the same value and a down payment of 10% helps to avoid paying for private mortgage insurance.
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