Second mortgages are often confused with home equity loans, as the concept of the two is fairly similar. If you’re looking for the definition of a home equity loan, you can find it here.
A second mortgage is an open loan that comes with flexible repayment options, meaning that it can be paid off in monthly installments, or can be paid off in full at any time should the funds become available to you. Second mortgages are ideal for people with poor credit, as you are approved for a second mortgage by the equity in your home, and not by your credit score or income. Those taking out a second mortgage do not require income or credit checks.
Only a relatively small amount of equity and capital is required to take out a second mortgage, making these attractive options to potential borrowers. Second mortgages tend to last much longer than other types of loans (such as personal loans) and often last 15-30 years depending on how much you borrow. As aforementioned though, you can usually pay this off in full at any time.
Second mortgages generally come with fixed interest rates, meaning that the interest you pay on these loans remains the same over the lifetime of your repayments. Your fixed interest rate on a second mortgage, however, is likely to be higher than the interest rate on your first mortgage. This is because a second mortgage uses your house as collateral, but is only second-in-line to the value of your house, with your first mortgage lender having priority to the value of your home. This makes a second mortgage riskier, and thus the interest rate goes up.
For example, say you have a home that is worth $200,000, and you have a first mortgage worth $150,000 (because you had a down payment of $50,000). If you then take out a second mortgage worth $100,000, you effectively owe $250,000 to two different lenders. Now, either one of these mortgage lenders can foreclose your property if you do not pay them on time, but it is more advantageous for the first (original) mortgage lender to do so.
Let’s say that you’re paying your first mortgage on time, but are falling behind on your second mortgage. The second mortgage lender may foreclose your home, but they may not receive any money from the home’s value. If your home is foreclosed and is still worth $200,000, for example, the first mortgage lender will reclaim their $150,000, and the second mortgage lender will reclaim the remaining $50,000 from their original $100,000 loan to you. In this case, you still owe them an additional $50,000, even after the foreclosure of your home. However, if your house appreciated in value to $250,000, you would be able to pay off both loans upon foreclosure. Houses can appreciate or depreciate for a number of reasons, so this is an important thing to consider.
Second mortgages have some advantages over conventional personal loans, but always remember that you are using your house as collateral. Make sure that you can afford both your first and second mortgage payments, otherwise, you may lose your home in the long run.