This is a type of loan that is taken out against the value of your property, which is generally your home. It is called second mortgage loans because you have done taken out a primary mortgage loan on your home. The second mortgage loan is considered a subordinate loan, which means if you default on paying them back the first mortgage would be the one that got paid back first and if there are any funds left after selling the property then it would go to paying back second mortgage loans. Generally this type of loan will carry a higher rate of interest along with closing costs and could make the cost more expensive.
With second mortgage loans the homeowner will be able to borrow as much as the equity they have in the home. For example if the homeowner has a home worth two hundred thousand dollars and currently owes one hundred thousand dollars on their first mortgage the second mortgage loan could be for as much as one hundred thousand dollars. This is the easiest type of second mortgage loan a homeowner can get because it is secured one hundred percent by the equity in the home. It is not as expensive as those that are not secured fully by home equity in the home. Second mortgage loans can also be taken out at the same time as the first mortgage loan. For example, if the first mortgage loan requires a down payment of thirty percent but the homeowner only has twenty percent they could apply for a second mortgage loan for the other ten percent. Second mortgage loans can also be a line of credit to be used when necessary.
Advantages of second mortgage loans
- Based on the amount of equity in the home, the homeowner can borrow a large amount of cash and have the flexibility to use it for anything. They can use the second mortgage loan for debt consolidation, paying for college tuition, home improvements, investing in other properties, and more.
- They are considered safer by lending institutions than other types of loans because they are secured by the homeowner’s home. If the homeowner faults on repaying the loan the lending institution will actually get something back, which is the home. This will help the borrower get a much lower interest rate,
- The interest from second mortgage loans is tax deductible.
Disadvantages of second mortgage loans
- Although they are considered safer they are also risky because if the homeowner is not able to repay the loan they run the risk of ruining their credit and losing the home to foreclosure.
- There are closing costs and fees involved like with first mortgage loans and you may also be required to pay points. A point would be equal to a percent of the value of the loan.
- The interest rates are higher than the first mortgage loan and the reason is that in case of default the first mortgage loan will be repaid first.