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What is a second mortgage?

It is a loan secured by the equity in a home, when a primary mortgage already exists.

 

Not too many years ago, lenders limited the amounts and restricted the instances that allowed a home owner to get a 2nd mortgage. In many circles, a second mortgage was considered disgraceful and was perceived as evidence that you were suffering from financial hardship. However, that situation no longer exists. There is now a wide selection of loans available to fit home owners needs, and although it's much easier to get a second mortgage on your home then it was 10 years ago, the recent credit crunch has caused banks to pull back the reins on Seconds and Home Equity Lines of Credit (HELOC's).

 

When would one choose a second mortgage?  The most common use of a Second mortgage is consolidate non-deductible debt such as auto loans, high interest credit cards and other bills with a Second Mortgage.  Home Equity Lines of Credit (a form of second mortgage) are commonly used for home improvements: remodeling, landscaping, new roof, new paint, adding a bedroom or bath.  Sometimes homeowners are able to take advantage of investment opportunities by using a Second Mortgage.  Where they can borrow against their home at a lower rate and use those funds to earn a higher rate, thus an Arbitrage.  Home purchasers will commonly us a Second Mortgage in lieu of private mortgage insurance, which is required if a home is purchased using one loan and the loan to value exceeds 80%.
 

How do rates on a second mortgage compare to those of a first mortgage?

Because there is more risk involved with a second mortgage, the lender's conditions are usually more stringent, the term is shorter and the interest rate is higher than for the first mortgage. In the event of default, the holder of the second mortgage is subordinate to the first.  With that said, it is not uncommon for a home owner with good credit and an low Loan-to-Value to be able to get a HELOC with a rate 1/2% below prime.

 

How is a second mortgage affected by a first mortgage refinance?

When a home owner refinances their first loan and they have an existing second mortgage loan, they will either consolidate the two loans into one new loan or request that the second lender subordinates. Which means that the existing second home loan will remain a junior lien compared to that of the refinance first loan. Otherwise, if the second is not subordinated, it will jump into first lien position and the refinance first loan will take over the second lien position.

A Second Mortgage loan allows the home owner to tap into a large sum of money and they can deduct the interest on their taxes up to a certain limit (consult your CPA). 

 

When deciding what type of loan is best for you, it is important to consider how you will use the money and how you intend to pay it off. Do you need money in one lump sum or intermittent over several months or years? Do you want a fixed interest rate so you can repay your loan in precise monthly installments or would you rather have the flexibility to make any size payment above the interest-only minimum? In today's competitive market, there are many options available. Chatting with one of our Mortgage Pro's will help you decide on the right mortgage product for your lifestyle and financial needs.

 

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