Second Mortgages

A second mortgage is a loan that is given by a lender that is secured against the home itself and is superseded by the first mortgage. Any mortgage that is given out against the owner’s equity in the home in addition to the existing mortgage is automatically considered a second mortgage.

If an owner is unable to make his debt repayments on his loans and is forced into foreclosure the holder of the second mortgage will not receive any money against their note until the first mortgage has been completely paid out.

Being a second mortgage holder is a more risky business model and generally requires the borrower to pay a higher interest rate than they do on their first loan for this increased risk.

Key Differences Of A Second Mortgage

• Second mortgages are usually lent for a shorter period of time (typically less than 15 years)
• Second mortgages can sometimes require a large “balloon payment” at the end of the repayment period that doesn’t happen in a fully amortized first mortgage
• Due to the increased risk to the lender the second mortgage loan has a higher interest rate than first loans, as mentioned earlier
• Second mortgages can be used to consolidate other debt payments (like credit cards and other high interest debt) into one payment with a lower interest rate

Most Popular Types Of Second Mortgages

1. Home Equity Loan – This is the traditional type of second mortgage where the entire loan amount is given out in a onetime payment (typically a single cheque) followed by a regular monthly repayment schedule at a fixed interest rate.

Home equity loans can be used for a variety of things from debt consolidation, home remodelling, funding a child’s university education or other large purchases requiring a large lump sum of money. The key here is that the home equity is securing the loan unlike a credit card loan for example where the loan is unsecured.

2. Home Equity Line Of Credit (HELOC) – This other popular type of second mortgage is quite a bit different in form than the home equity loan. As the name implies you will not receive a lump sum payment but a line of credit secured against your home’s equity. In fact it’s possible you may never even use any of the money in a HELOC depending on your reasons for getting it.

The line of credit type of second mortgage is money that you can borrow at a future time as needed. The amount of credit available in the HELOC does not change and can be used all at once or in several small amounts spread out over many months or even years.