What exactly is a second mortgage?
A second mortgage is exactly what it sounds like, a second mortgage on your home. Usually, when you purchase a home, you take out a single mortgage, called a “purchase loan” or “first mortgage,” to pay for the cost of the home. The lender will pay the seller in full, then you will repay the mortgage lender over a specified period of time, usually 15 or 30 years. As you pay down your first mortgage, and as home prices in your area rise, you will build equity in your home, meaning that your home is worth more than the amount you owe on your mortgage. Visit the Bills.com Home Equity Savings Center to learn if you can get equity from your home.
There are several ways to tap into the equity in your home: a refinance, a home equity line of credit, and a second mortgage.
In a refinance, a new lender will loan you cash based on your equity, along with enough to pay off your first mortgage. As a result you will receive a cash loan, and have a single new mortgage with new terms and with a higher balance than your original mortgage.
A home equity line of credit is a credit line based on the amount of equity in your home. You will not receive a fixed amount of cash at the time of loan signing. Instead, you will have a line of credit which you can access at your discretion. In many cases, you will receive a credit card that is attached to your credit line to facilitate your access to the line of credit. The monthly payments on your equity line are based on the amount of the line you use.
The third primary option is a second mortgage, which is probably the simplest of the three options I mentioned above. A second mortgage is also called a junior mortgage because it is second it time to the first. A second mortgage is a loan based on your home equity in which you receive a fixed amount of money at the time of loan closing. Unlike a refinance, a second mortgage does not pay off your first mortgage; the amount of your second mortgage will be only for the amount of money that you borrow against your equity. The payments and terms of your first mortgage will not change.
A second mortgage is considered to be a lower priority loan than your first mortgage because it is second in time. If you default on your mortgage payments and there is a foreclosure, your first mortgage must be paid in full before the second mortgage lender receives payment. For this reason, a second mortgage is a somewhat higher risk loan for the lender than a refinance loan. The primary benefit of a second mortgage for a borrower is that you are not required to alter the terms of your first mortgage, which is especially helpful if you have a low interest rate on your first mortgage note.
You should keep in mind that after you take a second mortgage, you will have two mortgage loans, and two monthly payments, so make sure that you do not borrow more than you can afford to repay. If you would like to learn more about mortgages, follow the link I just mentioned.
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