What is a Second Mortgage?
So, what is a 2nd mortgage?
The idea of a 2nd mortgage is that you’re taking out a secured loan against the home equity in your home. The more equity you have, the more you can borrow. However, drawing out a 2nd mortgage does mean that you will be required to pay off two mortgages every month.
What is Home Equity?
Home equity is the value of your home less your remaining mortgage balance. Over time, the more principal you pay down, the more equity you accumulate. For example, if you buy a $300,000 house with $60,000, you automatically hold 20% equity in that piece of real estate. The starting mortgage balance will be $240,000 ($300,000 less your $60,000 down payment).
How Does a Second Mortgage Work?
The 2nd mortgage is a loan taken out against your home on top of your original purchase mortgage. Whether you qualify depends on several factors, including the amount of equity you have and your current income.
It goes by the name “second mortgage” because in the event your home is foreclosed on, the lender of the purchase mortgage will be paid first. Anything left over goes to the lender of the additional mortgage.
The vast majority of these loans come with fixed monthly repayments and work in the same way as any mortgage.
What Second Mortgage Rates Should You Expect?
Rates on a second mortgage are typically higher than the rate on a purchase mortgage.
The reason for a higher 2nd mortgage rate is that the lenders are taking a bigger risk. They know if you go into foreclosure, they will have to stand in line to get paid. Homeowners who go into foreclosure rarely have enough to pay both lenders in full after completing the process.