How Do Second Mortgages Work?

Many homebuyers don't know they can take a second mortgage on their homes. The first loan, the primary mortgage, is taken while purchasing a property. A second mortgage is a type of mortgage that lets you borrow against the value of the same property while your first loan is not fully paid.

Knowing how second mortgages work can be beneficial in the future, especially when you need quick cash for an emergency, school fees, debt, and more. In this article, we’re going to break down how second mortgages work and when you might consider getting one.

What is a Second Mortgage?

A second mortgage is a type of subordinate mortgage obtained while a primary mortgage is still in effect. In cases of default, the proceeds from the home’s liquidation would first go to the primary loan. Anything left over would then roll over into settling the secondary mortgage.

The interest rates for second mortgages are usually higher because a second mortgage would only receive repayments when the primary mortgage is paid off, but the amount borrowed will be less compared to the primary mortgage.

A loan is always taken out against the equity in your property, and second mortgages aren’t exempted from that. The loan amount that a second mortgage lender will offer depends on the equity you’ve built up in your home.

Benefits of Second Mortgages

Just like other loans, a second mortgage has its advantages. Here are some reasons you might consider a second mortgage over refinancing your current mortgage.

Get a Higher Loan Amount

Getting a second mortgage can let you get high loan amounts. Some lenders will let you borrow up to 80% of your home’s worth. This means you can borrow more cash with a second mortgage than with other loans, especially if you’ve been paying your loan for a long time.

Lower Interest Rates

Second mortgages usually have lower interest rates compared to other types of loans. It’s because second mortgages are considered secured debt. This means second mortgages have collateral behind them; the collateral being your property. Because there are fewer risks for lenders, lenders will offer lower rates for second mortgages than credit cards.

Types of Second Mortgages

Home Equity Loan. A home equity loan lets you take a lump-sum payment from your home’s equity. When you take out a home equity loan, your second mortgage lender gives you a percentage of your equity in cash.

In return, the lender gets a 2nd lien on your home. You pay the mortgage back in monthly installments with interest, just like your primary mortgage.

Home Equity Line Of Credit (HELOC). HELOCs don’t give you cash in a single lump sum. They work like credit cards. Your lender approves you for a line of credit based on the amount of equity your property has. After that, you can borrow against the credit the lender offers you.

Conclusion

If you’re qualified for a second mortgage, it can help you pay for home renovations, pay for your child’s tuition fee, and more.