2nd Mortgage – Second Mortgage: Advantages and
When going through the home loan process, you will have to sit at a
table with a title officer and sign your closing documents in most cases. During this process terms
will be thrown out all over the place. One such term may be 2nd
mortgage, but what exactly is a 2nd mortgage and how does it work? Let's go over what a 2nd
mortgage actually is and why these types of loan programs exist.
First, a 2nd mortgage is just that, a 2nd
mortgage. For example, if you have a home that is worth $300,000 dollars, you may have a first
mortgage for $250,000 and a second mortgage for $50,000. The most common situation
in which a 2nd mortgage is obtained is when a person wants to pull equity out of a home to use for a remodel, or
any other financial need. A borrower simply goes through a mortgage refinancing process in which the house will be analyzed for the equity amount needed to create a
2nd mortgage. Having a 2nd mortgage means that you will have two house payments, one payment for
the first mortgage, and one payment for the 2nd.
Now that we understand what a 2nd mortgage is,
why exactly do these types of loan programs exist? The biggest reason why a
2nd mortgage would be used is to liquidate the assets that someone own, and in this case that would be real
estate. 2nd mortgages can work in many different ways. For example, if a person
is pulling equity out of the home, they can choose to get a 2nd mortgage that has a fixed
rate. When doing a mortgage
refinance you can also get a 2nd mortgage with an
adjustable rate, or that is treated like a line of credit just like a credit card. This type of option is
very convenient because it makes the equity available to use, but you don't have to use it if you don't want
this type of set up, you only pay on what money you are using, which is a great option for someone that
temporarily needs to free up some money in an asset.
2nd Mortgage holders often take a much bigger
risk than the 1st mortgage company, and as such charge higher rates. This makes a 2nd mortgage
a bad option for those that need a bad credit mortgage. If you have great credit, the 2nd mortgage options available to you may be a viable
way to free up some equity in your property.