By Susan M. Keenan
A second mortgage is often referred to as a home equity loan. Second mortgages are acquired after a first mortgage is already in place. The first mortgage takes priority and is the first lien on the house. The second mortgage is the second lien on the house. Should a foreclosure occur, the first mortgage debt takes precedence and would be repaid first from the money secured by the foreclosure.
Second mortgages have become quite popular as financial tools for personal use. Individuals acquire second mortgages for a variety of reasons, most notably for home improvements, college expenses, unexpected medical costs, debt consolidation, and home remodeling or renovations. Additionally, second mortgages are sometimes acquired for investment purposes, vacations, or ready cash.
Individuals who have amassed a large amount of debt through car loans, credit card balances, and other personal expenses, such as tuition or medical and dental costs, may acquire a second mortgage in an attempt to handle their debt more effectively. The ready cash available with a second loan gives the consumer the ability to pay off creditors and get back to a schedule of manageable payments to decrease their debt. This maneuver can be the difference between maintaining a bad financial situation and improving it.
In some instances, individuals may have an opportunity to invest an amount of money in a profitable venture. The cash needed for this venture can come from a second loan. If the loan costs an annual interest rate of 6%, and the return on the investment comes to 9%, the individual has realized a nice size profit or return on the investment.
Furthermore, certain home buyers may decide to acquire a second mortgage at the same time they acquire a first mortgage in order to avoid the cost of mortgage insurance. Any down payment on a home that is under 20 percent of the purchase price requires the new homeowner to acquire mortgage insurance. However, if the homeowner is able to acquire a second mortgage that makes up the balance of the 20 percent, then he can avoid the extra cost of mortgage insurance. Since mortgage insurance can be expensive, trimming its cost is a positive move. Additionally, the homeowner can declare the interest if he itemizes on his tax form, and receive a tax break as well.
Additionally, many homeowners acquire second mortgages to pay college tuition expenses for their children. Several things determine limits on the amount of money that a homeowner may borrow with a second mortgage. The amount of equity in the home plays an important role in determining the size of the loan the lender may be willing to make. The amount of pre-existing debt that the homeowner is carrying and the gross income of the homeowner are also critical components of this process.
The process of acquiring a second mortgage is quite similar to that used to acquire a first mortgage, but is actually much simpler. Primarily, the borrower will need to have a good credit history, a reliable source of income, and a home with built-up equity. Additionally, if the borrower acquires the second mortgage from the same lender who supplied the first mortgage, the process is simpler and quicker.
Two main differences exist between a second and a first mortgage. The second mortgage, or home equity loan, will have slightly lower closing costs. However, the second mortgage will have slightly higher interest rates.
Loan vs. Line of Credit
There are two main types of second mortgages: a home equity loan and a home equity line of credit. A home equity loan resembles a first mortgage. The borrower receives a lump sum of money that is amortized over a predetermined number of years, per the term of the loan. Home equity loans may have terms of one, three, five, ten, or more years. The term is selected at the time the loan is acquired. If the home equity loan is a fixed-rate loan, then the monthly payments will remain the same over the life of the loan.
If the home equity loan is an adjustable rate mortgage, also known as an ARM, then the initial interest rate is set for a specified number of years before it is adjusted to a new rate. These terms of the loan are determined at the origination of the loan. Additionally, this type of loan results in monthly payments that will change in the amount due once the new interest rate takes place.
A home equity line of credit, on the other hand, provides a predetermined amount of money for the borrower’s use. The borrower may use portions of the line of credit while maintaining a balance on the remainder. A home equity line of credit is a popular loan for borrowers who need to finance expenses that occur periodically rather than all at once, such as tuition and certain types of medical expenditures.
The monthly payments on a home equity line of credit will vary depending on the amount of the money that the borrower has used. Therefore, the lender cannot divulge the amount of the monthly payments at the origination of the loan. However, the lender is required to explain to the borrower the manner in which the payment will be calculated.
The home is used as collateral for a second mortgage, so defaulting on this loan puts the borrower at risk for a foreclosure. If the homeowner cannot make the monthly payments and defaults, the home can be seized and resold to pay the homeowner’s debts, beginning with the first mortgage.
When acquiring a second mortgage, borrowers should be sure to research their options and discuss the terms of the loan prior to finalizing the arrangement. Borrowers should exercise caution and only borrow the monetary amount they need.
Second mortgages have become quite popular as financial tools for personal use. Individuals acquire second mortgages for a variety of reasons, most notably for home improvements, college expenses, unexpected medical costs, debt consolidation, and home remodeling or renovations. Additionally, second mortgages are sometimes acquired for investment purposes, vacations, or ready cash.
Individuals who have amassed a large amount of debt through car loans, credit card balances, and other personal expenses, such as tuition or medical and dental costs, may acquire a second mortgage in an attempt to handle their debt more effectively. The ready cash available with a second loan gives the consumer the ability to pay off creditors and get back to a schedule of manageable payments to decrease their debt. This maneuver can be the difference between maintaining a bad financial situation and improving it.
In some instances, individuals may have an opportunity to invest an amount of money in a profitable venture. The cash needed for this venture can come from a second loan. If the loan costs an annual interest rate of 6%, and the return on the investment comes to 9%, the individual has realized a nice size profit or return on the investment.
Furthermore, certain home buyers may decide to acquire a second mortgage at the same time they acquire a first mortgage in order to avoid the cost of mortgage insurance. Any down payment on a home that is under 20 percent of the purchase price requires the new homeowner to acquire mortgage insurance. However, if the homeowner is able to acquire a second mortgage that makes up the balance of the 20 percent, then he can avoid the extra cost of mortgage insurance. Since mortgage insurance can be expensive, trimming its cost is a positive move. Additionally, the homeowner can declare the interest if he itemizes on his tax form, and receive a tax break as well.
Additionally, many homeowners acquire second mortgages to pay college tuition expenses for their children. Several things determine limits on the amount of money that a homeowner may borrow with a second mortgage. The amount of equity in the home plays an important role in determining the size of the loan the lender may be willing to make. The amount of pre-existing debt that the homeowner is carrying and the gross income of the homeowner are also critical components of this process.
The process of acquiring a second mortgage is quite similar to that used to acquire a first mortgage, but is actually much simpler. Primarily, the borrower will need to have a good credit history, a reliable source of income, and a home with built-up equity. Additionally, if the borrower acquires the second mortgage from the same lender who supplied the first mortgage, the process is simpler and quicker.
Two main differences exist between a second and a first mortgage. The second mortgage, or home equity loan, will have slightly lower closing costs. However, the second mortgage will have slightly higher interest rates.
Loan vs. Line of Credit
There are two main types of second mortgages: a home equity loan and a home equity line of credit. A home equity loan resembles a first mortgage. The borrower receives a lump sum of money that is amortized over a predetermined number of years, per the term of the loan. Home equity loans may have terms of one, three, five, ten, or more years. The term is selected at the time the loan is acquired. If the home equity loan is a fixed-rate loan, then the monthly payments will remain the same over the life of the loan.
If the home equity loan is an adjustable rate mortgage, also known as an ARM, then the initial interest rate is set for a specified number of years before it is adjusted to a new rate. These terms of the loan are determined at the origination of the loan. Additionally, this type of loan results in monthly payments that will change in the amount due once the new interest rate takes place.
A home equity line of credit, on the other hand, provides a predetermined amount of money for the borrower’s use. The borrower may use portions of the line of credit while maintaining a balance on the remainder. A home equity line of credit is a popular loan for borrowers who need to finance expenses that occur periodically rather than all at once, such as tuition and certain types of medical expenditures.
The monthly payments on a home equity line of credit will vary depending on the amount of the money that the borrower has used. Therefore, the lender cannot divulge the amount of the monthly payments at the origination of the loan. However, the lender is required to explain to the borrower the manner in which the payment will be calculated.
The home is used as collateral for a second mortgage, so defaulting on this loan puts the borrower at risk for a foreclosure. If the homeowner cannot make the monthly payments and defaults, the home can be seized and resold to pay the homeowner’s debts, beginning with the first mortgage.
When acquiring a second mortgage, borrowers should be sure to research their options and discuss the terms of the loan prior to finalizing the arrangement. Borrowers should exercise caution and only borrow the monetary amount they need.
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