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What Is a Second Mortgage?

August 5th, 2022 | 2 min. read

What Is a Second Mortgage?

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A second mortgage is a secondary loan that can be used for home improvement projects, debt consolidation, or other purposes. There are two main types of second mortgages: home equity loans and home equity lines of credit (HELOCs).

Home equity loans are lump-sum loans with fixed interest rates, while HELOCs are revolving lines of credit that can be used as needed. Second mortgages typically have higher interest rates than first mortgages, and they also involve additional fees. These products can be a good option for borrowers who need extra cash, but it’s important to understand the pros and cons before applying.

Both a home equity loan and a HELOC allow the borrower to borrow against the equity in their homes.

  • Home Equity Loans: The equity amount is based on the homes current market value and the borrower's current mortgage amount that's due.   
  • Home Equity Lines of Credit (HELOC): [MISSING DEFINITION]
  • Piggyback Mortgage Loan: This is also a second mortgage where the borrower can take out two separate loans for the same exact house.

Pros

  • You can use the second mortgage as you please. There aren't laws to tell you how you can use the loan meaning you can put the funds towards other types of debt, for a wedding, etc.
  • You could receive a higher loan amount depending on the lender's qualifications and requirements.
  • Second mortgages can help you avoid paying for PMI where many lenders require their borrowers to pay if the borrower has made less than 20% down payment.
  • Taking out a second mortgage gives you the ability to access the equity in your home and potentially receive a lower interest rate if the mortgage is used for investment purposes.

Cons

  • You're putting on another loan on top of the original (primary loan). You'll be paying back more money to the lender in monthly payments. 
  • The rates tend to be higher than the first mortgage since taking on a second mortgage is riskier for the lender.
  • There are risks of foreclosure if you default on the loan and the possibility of having to pay Private Mortgage Insurance if you do not have a large enough down payment.

Who is this ideal for? Borrowers who need extra cash for home improvements or other purposes and who have enough equity in their home to qualify for a second mortgage. 

 

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Yanna

Yanna

As the Content Specialist and author of the Learning & Guidance Center, Yanna enjoys motivating others by uncovering all that's possible in the world of finance. From financial tips and tricks to ultimate guides and comparison charts, she is obsessed with finding ways to help readers excel in their journey towards financial freedom.

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