What is a ‘Second Mortgage’
To understand how a second mortgage works, one must first understand what a second mortgage comprises of. A second mortgage may be referred to as a subordinate mortgage; a kind of mortgage that is made on the bases of the original mortgage. Should the borrower be a defaulter, the original mortgage would be used to pay off the second mortgage through liquidating the property. Only after the first mortgage payments have been cleared, the second mortgage can be initiated; hence for the second mortgage, the rate of the interest charged is relatively higher where as the comparatively to the mortgage amount borrowed the first time, the borrowable amount for the second mortgage also tends to be lower. This may also be referred to as a home equity loan.
How is home equity loan related to second mortgages?
Now that the first and second mortgages have been explained, it is easier to understand how home loan equity fits into all of this. As a borrowed continues to make monthly mortgage payments on due time, what happens is that it creates a good credit history, which in turn economically appreciates, the value of his home. Whatever remaining payments that the borrower has, in difference with the market value the property would currently have, would become the home equity. This home equity becomes the basis on which the owner may be entitled to a tale out a loan; this loan talk out against the home equity, is what is known as a second mortgage.
Benefits of Second Mortgages
- Loan amount: Second mortgages allow you to borrow almost eighty percent of your homes value; even though the borrowed amount depends on the lender, however the security that which comes with your home makes it easier to take out a substantial amount of loan.
- Interest Rates: Comparatively to the other kinds of debts, the interest rates of second mortgages are relatively lower; since the loan has been tied down to your home as a security measure. As opposed to the rather unsecured personal loan systems such as credit lines, the interest rate for second mortgages is usually in single digits.
- Tax benefits: Second mortgages often come with a reduced paid interest; however consultation with your tax preparer before availing such second mortgages is recommended.
Possible downside of Second Mortgages
- Risk of foreclosure: the most eminent issue and risk that comes with second mortgages is that of foreclosure; one must risk losing their home. The lender can easily be in possession of your home, should you not be able to make due payments.
- Cost: the cost at which you receive your Second mortgage, may come with a high price; your are required to pay for appraisals, initial fee to receive the loan, credit checks amongst other costs. The transparency of these costs are rather hazy, if you have little to no knowledge of how second mortgages work.
- Interest costs: the interest rates for second mortgages may be lower than that of credit cards but they are relatively higher than the interest paid on your first mortgages. It also becomes a risk for the lender who might not get paid at all unless your first mortgage payments are received; since the total amount paid, then becomes comparatively bigger, it makes for quite a substantial amount of paid interest rate as well.