Second Mortgage: What Is It Exactly?
The real term for this is called a home equity loan. This is a common loan type that homeowners can use for whatever purpose they want.
A home equity loan requires that you use your house for collateral just like a normal home loan. It is based on the equity that has built up in your home. There are different types of home equity loans out there that can be utilized in different ways.
College, bills, and home repairs are some common uses. You will need outstanding credit to be approved for this kind of loan though.
A closed end type home equity loan gives you a big chunk of money immediately. You will not be able to get another loan until this one is fully paid. This is a true second mortgage.
The amount you can get depends on factors such as how much your home is worth, your income, credit score, and similar things. A closed end loan usually comes as a fixed rate type and allows you up to 15 years to pay it off.
An open ended home equity loan is a little different. This loan will let you borrow money whenever you have a need for it.
The loan lender will set up a line of credit that is pretty much based on all the same factors as the closed end loan. These usually have an adjustable rate with a payment schedule of 10, 15, or even 30 years. This type of second loan is similar to a credit card in that it is accessed as needed.
So why are these called second mortgages? Because you are adding yet another loan payment that uses your house as collateral and adding another monthly payment. Though tempting, it can cause you a lot of problems in the future.
Another important factor to consider is that if, at any time, you wish to refinance, both the original mortgage and second mortgage will have to be refinanced together. Otherwise, the second mortgage lender must subordinate to the first mortgage lender. This means that the second mortgage lender allows the first lender to be in the first position in case of a default. If you have ever been late on a second mortgage payment, chances are that the second mortgage lender will not subordinate.
In difficult real estate times, such as the current one, lenders will not give out second mortgages for fear of additional loss of equity since the loan amount is truly based on the amount of available equity in the home.
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