A second mortgage is an additional mortgage on a property where a primary mortgage already exists. Second mortgages are secured against the same equity as the first mortgages. Therefore the second mortgage is based on the property’s current value and the amount that is still owed. Second mortgages are often granted by the lender of the first, but can be obtained from a different lender.
When choosing a second mortgage, there are typically three different types available. A traditional second mortgage, where there is usually a fixed rate, and a term of 15- 30 years; a home equity line of credit, where the rate is typically adjustable and the funds are drawn as needed; and a home equity loan in which the borrower uses the equity of their home as collateral. In a home equity loan, the equity of the home is usually reduced. To help determine which loan type is best, it is wise to speak with a competent mortgage broker.
In most cases, second mortgages are loaned at higher rates than those of first mortgages. The reason for this is due to the fact that the lender of the second mortgage is entering into a higher grade of risk. This increased risk does not directly correspond to the credit of the home buyer, but rather to the availability of funds second mortgages can claim. In the event of a default the property is sold, and the proceeds are applied to the repayment of the loan amount. Primary mortgages always take precedent over secondary mortgages; therefore second mortgages have to await settlement of the first mortgage before any left over proceeds can be claimed. This is what defines the second mortgage as a higher risk mortgage.
In second mortgages not only is there a higher interest rate, but the second mortgage is also written for a shorter term than that of the first mortgage. Therefore, it is important to take appropriate precautions to ensure that the mortgage can be repaid on time. This risk should always be carefully weighed when any mortgage, whether first or second, is being sought.
A second mortgage can help relieve stress from financial crisis. A second mortgage can allow access to a home‘s equity. A second mortgage is often acquired to make repairs or enhancements on a home, thus increasing the value of the property. However second mortgages can be used for other non-related financial situations, such as paying off college tuition or lowering your debt load.
Paul Mangion