Second Mortgage
Everyone has heard a friend or relative complain about having to take out a second mortgage but don’t really know what that means. Let’s find out!
The real term for this is called a home equity loan. This is a common loan type that homeowners can use for whatever they want. A home equity loan requires that you use your house for collateral just like a normal home loan. There are different types of home equity loan out there and you can always use the money for whatever you want.
College, bills, and home repairs are some common uses. You
will need outstanding credit to be approved for this kind of loan though. A closed end type home equity loan gives you a big chunk of money immediately and you can’t get another loan until this one is fully paid. The amount you can get depends on factors such as how much your home is worth, your income, credit score, and similar things. A closed end loan usually comes as a fixed rate type and allows you up to 15 years to pay it off.
An open ended home equity loan is a little different. This loan will let you borrow money whenever you have a need for it.The loan lender will set up a line of credit that is pretty much based on all the same factors as the closed end loan. These usually have an adjustable rate and you can make payment for 10, 15, or even 30 years.
So why are these called second mortgages Because you are adding yet another loan payment that uses your house as collateral and adding another monthly payment. Though tempting, it can cause you a lot of problems in the future.
In the most common type of second mortgage, a homeowner may borrow up to the amount of equity he or she has in the home. For example, if the owner has a home valued at $100,000 and currently owes $75,000 on the first mortgage, a second could be taken out for $25,000. Because this type of second is still 100 percent secured by equity, it is the easiest type of second mortgage to get, and will not be as expensive as other second mortgages that are not fully secured.
There are actually several types of second mortgages. A line-of-credit second mortgage is one in which the homeowner does not take cash out immediately, but instead, applies for a line of credit secured against the home, which can be used as needed.
In some cases, a second mortgage is taken out at the same time as the first to help qualify for a new purchase. A borrower may, for example, qualify for a first mortgage that requires 30 percent down. If the borrower only has 20 percent, they may be able to take out a second mortgage for the additional 10 percent.
It is also possible to obtain a second mortgage in excess of your home's value. With a 125 percent loan-to-value loan, your total indebtedness can be 125 percent of the value of your home. This type of loan may be more difficult to obtain, and may require superior credit. A major disadvantage of this type of loan is that your interest will not be completely tax-deductible. Mortgage interest is allowed as a tax deduction only up to the amount secured by real estate.