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An Introduction to the Second Mortgage Loan

An Introduction to the Second Mortgage Loan Team
UpdatedApr 18, 2024
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    3 min read
Key Takeaways:
  • Review the types of second mortgages available.
  • Understand the differences between a Home Equity Loan and Home Equity Line of Credit.
  • Use funds from a second mortgage wisely.

An Introduction to the Second Mortgage Loan

The term "second mortgage loan" is not frequently used by lenders anymore. The traditional second mortgage is now more commonly called a Home Equity Loan (HEL). A Home Equity Line of Credit (HELOC) is also referred to as a second mortgage. Both loans are secured by the equity in your home, but there are differences between them.

Home Equity Loan

The home equity loan is similar to the traditional second mortgage your parents may have had. Equity is the difference between the current market value and the principal balance of the mortgage loan. A home equity loan uses that difference as collateral for a second loan against your home. It doesn't replace a first mortgage. Because it will be the second debt paid if you default on your loans, it has a higher interest rate than a comparable first mortgage. Most home equity loans have a fixed rate, although some are offered as adjustable rate mortgages. With a HEL, you receive a lump-sum payment in cash and then repay the loan over a fixed period of time.

Home Equity Line of Credit

A home equity line of credit also uses the equity in your home as collateral. Rather than a fixed sum of money, your lender issues you a credit line with a fixed limit. You access the money by writing checks or using a debit card linked to it. HELOCs have a variable interest rate that is based on an index, such as the prime rate, plus a percentage. You may borrow funds any time between the issuance of the credit limit and its expiration date, which can be anywhere from three to twenty-five years. Your repayment terms and amounts vary, depending on the amount borrowed and current interest rat you are paying. Many HELOCs require you to remove an initial sum and not repay it until the line of credit expires. Many also require a minimum withdrawal each time you access the funds.

How to Use a Second Mortgage

Regardless of which type of second mortgage loan you choose, second mortgages should primarily be used to:

  • Make home repairs
  • Remodel your home
  • Pay education expenses for you or your child
  • Reduce other debts
  • Pay medical expenses
  • Pay emergency expenses

In other words, a second mortgage should be used to improve your child's or your financial future. It should not be used for non-real estate investments or purchases of consumer goods like televisions, cars, boats, or other big-ticket items.

Second Mortgage Right of Rescission

You have three business days, not including Saturdays, Sundays, and legal holidays, from the date you sign your home equity loan documents to cancel the loan without cost to you. The loan must be against your primary residence. If you used the same lender as your original loan, then you only qualify for rescission if you increased the amount of your original loan with a cash-out refinance or took out a home equity loan. You can rescind any mortgage refinance or home equity loan within the three day period if you used a different lender.

Mortgage market: a pulse check

No surprise that mortgage rates fluctuate. If you are thinking about purchasing a home or maybe considering refinancing your current mortgage, then you want to be up to date on mortgage rates.

Mortgage rates April 10, 2024
According to Freddie Mac, the 30-year mortgage rate for the week of April 10, 2024 stands at 6.88%. This reflects a 6 basis points increase from the previous week's rate.
Note: A basis point is equal to one-hundredth of one percent (0.01%). In numerical terms, if the mortgage rate changes by 20 basis points, it means the rate has changed by 0.20%.
Additionally, Freddie Mac reports that the 15-year mortgage rate for April 10, 2024 is 6.16%, indicating a 10 basis points increase from last week’s rates.

What does the mortgage rate mean for you?
Mortgage rates are one of the key factors that determine your monthly payment. Here are avergage interest rates (APR) for April 14, 2024 based on Zillow date for borrowers with a high credit score (680-740) in the United States:

  • 30-year conventional loan is 7.09%
  • 15-year conventional loan is 6.29%
    Using the rates mentioned above, the monthly payment for a $279,082 30-year-year mortgage would be $1,874. A 15-year mortgage would require a monthly payment of around $2,399.

Simplify your mortgage journey: Shop around and get pre-approved today!
To make the home-buying or refinancing process a breeze, we highly recommend shopping around for mortgages and getting pre-approved. So, why not Check Out mortgage rates now for the best options available.