Second Mortgage

A second mortgage is a secured loan (or mortgage) that is subordinate to another loan against the same property. More specifically, the second loan in sequence.

In real estate, a property can have multiple loans against it. The loan which is registered with county or city registry first is called the first mortgage. The loan registered second is called the second mortgage. A property can have a third or even fourth mortgage, but those are rarer.

Second mortgages are called subordinate because, if the loan goes into default, the first mortgage gets paid off first before the second mortgage gets any money. Thus, second mortgages are riskier for the lender, who generally charges a higher interest rate.

Adding a second mortgage loan on title does not change the terms of your existing first mortgage. The second mortgage rate will remain fixed for the full term of the loan, which is available in 5 year increments, ranging from 5 to 25 years. 

The primary difference between second mortgages and home equity loans is the maximum loan to value allowed, which can be as high as 125% of value. Keep in mind that if you borrow more than your home is worth, there may be a loan balance due if you sell your home, and the tax deductible interest is limited to the lesser of 100% of value, or $100,000.

The full amount of your second mortgage is dispersed directly to you by the lender at the loan closing, unless there is an agreement to pay any third parties directly. For example, it may be required for some borrowers to pay off certain debts in order to meet the debt to income ratio.

Cash from a second mortgage can be used for any purpose, such as, consolidating debts or home improvement. There can be a few ways to save money when consolidating your debts: By reducing your interest rates and monthly payments, converting compound interest into simple interest, and by converting your non-tax deductible interest on monthly debt payments into a new tax deduction.

Home Improvements

If you are looking to add some improvements to your home and are wondering where you can find the money, the answer is all around you. If you have been in your home for a while or if you live in an area where homes have been appreciating, you probably have built up some home equity. This home equity can be drawn out through a second mortgage and can be put right back into your home through home improvements.

Second mortgages are something that scare a lot of people. There is really nothing to be afraid of. A second mortgage does not mean that you have more money invested in your home than it is worth, if you are careful. Most people who take on a second mortgage do it without ever using the funds. Rather, the funds available from the second mortgage rest where they are for that rainy day that may come along.

If you are looking to boost the value of your home through improvements, talk with a mortgage specialist about the possibility of a second mortgage. You can take advantage of extremely low second mortgage rates and fix up your home without having to come out of pocket.