Second Mortgage Resources and Information

Highlights

  • Understand what a second mortgage is.
  • Compare Home Equity Loans (HELs) with Home Equity Lines of Credit (HELOCs).
  • Use funds from a second mortgage only for important expenditures.
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Your Complete Second Mortgage Guide

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 a traditional second mortgage. 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.  You should be very cautious about using it for investments or purchases of consumer goods like televisions, cars, boats, or other big-ticket items.

Any time that you borrow from your home equity, thereby reducing your equity stake, there are risks involved. For instance, if your home drops in value after you have borrowed against a high percentage of your home's value, you may not be able to sell it for more than you owe. This can trap you in your home, unless you have enough money set aside to pay off your lenders at the time of sale.

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.

Like any financial product, a second mortgage is neither a good or bad thing on its own. The key is what will it do for you, what will it cost you, and are the potential risks you take outweighed by the benefits that come your way. Take your time and weigh all the factors, before making any major financial decision.

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9 Comments

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  • FR
    Feb, 2014
    fredo
    Escondido, CA
    What opinions does one have in order to keep a house when the second mortgagee is not willing to settle or agree to payments? The mortgagee wants all the money at once.
    0 Votes

    • BA
      Feb, 2014
      Bill
      Read the Bills.com article Second Mortgage Foreclosure to learn more about mortgage foreclosures, and alternatives to foreclosure. Please ask any follow-up questions you may have on that page.
      0 Votes

  • LG
    Jan, 2014
    Liz
    Hialeah, FL
    Pardon my insistence. When my second lender bought the loan I was in foreclosure with my first mortgage. Currently my mortgage has equity and already it is not foreclosed. Real Time Resolutions, Inc. contacted me and sent some documents so I filled them out and asked me how much I owe to my first mortgage and if I'm OK with my payments. Also (they asked for) my bank accounts and personal taxes. They tell me I can make them an offer in writing and to send them a letter explaining why I delayed payments. I spoke with an attorney concerning the Statute of limitation for more than 5 years ago that failure to pay my second loan. The lawyer recommended me to seek to reach an agreement with them because it cost more expensive to sue them. I do not know what to do.

    Can my second lender know if my house is foreclosed or not? On my credit report if you see the value of my house but idk if they are going to check there. What should I do in this case?
    • First mortgage $142,000. Before the value was $296,000.
    • Second mortgage $74,000.
    • More $26,000. for nonpayment.
    • Current value of mortgage $220,000.

    Documents that I sent I can say that my house is still in foreclosure? My second lender has access to my credit report? Thank you.

    0 Votes

    • BA
      Jan, 2014
      Bill
      Consult with your attorney about the forms Real Time Resolutions sent you. Perhaps your lawyer can help you negotiate a settlement with Real Time Resolutions.

      A collection agent like Real Time Resolutions and your second mortgage lender have access to your credit report. Assume that Real Time Resolutions and your lenders can see anything appearing on your credit report.

      Credit reports do not contain information about property you own. However, this is public information, and is available at your county recorder's office. It is also available from Web sites such as Trulia and Zillow.
      0 Votes

    • LG
      Jan, 2014
      Liz
      Hialeah, FL
      Thank you a lot for your help.
      0 Votes

  • LG
    Jan, 2014
    Liz
    Hialeah, FL
    Mortgage demand was in 2009 for the first loan, in January of 2013 Bank of America modified the first loan reducing the principal, now my house has a value of 210000 dollar and the first mortgage was reduced to 146000, the second loan (Heloc) Bank of america sold it in 2010 to a collection agency in October 2008 was the last payment I made. The collection agency sent me some documents so I sign them and send them to you, I did not, they follow calling.Can they sue me? It's been more than 5 years from the last payment.I have understood that in florida are 5 years to sue a promissory note, but I'm not sure how it applies in the second mortgages.I expect a demand or see a lawyer before I require?Sorry my English is not good.Thank you.
    0 Votes

    • BA
      Jan, 2014
      Bill
      Liz, you need to speak with a lawyer. Take all the documents you have regarding the HELOC, including the ones the collection agency sent you, to your meeting with your lawyer. He or she will advise you whether you are responsible for the second mortgage debt.
      0 Votes

  • LG
    Jan, 2014
    Liz
    Hialeah, FL
    I bought my house in 2006 with a Countrywide 80/20. In 2009, Bank of America presented the first mortgage foreclosure. In January 2013, they modified the first mortgage. The HELOC second loan was sold in 2010 to RTR collection agency. Since September 2008, I have not paid my second loan. How does the statute of limitations apply living in Florida?
    0 Votes

    • BA
      Jan, 2014
      Bill
      Florida statute 95.281 applies here, as well as several cases interpreting 95.281, including one decided by the Florida Supreme Court. You do not provide enough facts for me to offer a meaningful answer to your question. Consult with a Florida lawyer who has experience with mortgage law and foreclosures. He or she will review your facts and give you an opinion on your situation.
      0 Votes

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