All About Second Mortgages

Dated: August 31 2020

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A second mortgage is a home equity loan or a home equity line of credit, and just like your original mortgage, a second mortgage is secured by your home. Although it may seem counter-intuitive to take out “another loan” on your home, a second mortgage is a way for you to tap into your resources without selling your home.


All About Second Mortgages


The two primary types of second mortgages are home equity loans and home equity lines of credit. One of the main differences between these two home loans is how you receive the money and how you repay it. Just like a traditional loan, a home equity loan gives you a lump sum which you’ll repay at regular intervals over time. Interest rates are typically fixed with a home equity loan.


A home equity line of credit works more like a credit card. And just like a credit card, you use your credit only when you need it. Also, interest is charged only on credit used. Interest rates are typically adjustable with this type of second mortgage.


How To Use a Second Mortgage


Homeowners use their second mortgage for a variety of projects such as to pay for home improvements or repairs, buy a second home or pay off debt. There are some limitations as to what you can use the funds for, but generally speaking, you have many options.


A word of caution, however. While there may not a be a restriction on using the funds for items such as vacations or a lavish shopping spree, we recommend that you don’t use your second mortgage for these expenses. Remember that your home secures the second mortgage, and a tour of Europe, no matter how grand, is not worth risking your home.


The Benefits of Second Mortgages


The biggest advantage is that you get a large amount of money all at once and can use it immediately on pretty much whatever you want. Also, any interest you pay may be tax deductible. Talk your tax adviser for more information.


Possible Disadvantages of Second Mortgages


The primary downside of second mortgages is the inability to repay the loan and losing your home.


Another disadvantage is that there are fees involved, much like there was with your first loan. Also, if your score isn’t all that great, your interest rate will be on the higher end of the spectrum.


How Much Money Can You Get?


The amount depends on how much equity is in your home, your credit score, and the loan-to-value ratio. If the combined loan-to-value ratio of both your first and second mortgage is greater than 75 to 85 percent, it may not be possible to get the second mortgage.


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