What is a Second Mortgage?

Published by julia | Filed under Buyer / Seller Tips, Market Trends, Miscellaneous, Pinellas County Homes, Real Estate

Everyone has heard a friend or relative complain about having to take out a second mortgage but many people don’t really know what this means. Second mortgages are very common, and if you’ve never taken one out, the chances you might have to one day are very strong.  The real term for this type of loan is called a home equity loan. Homeowners often take the equity in their home out as a loan to use for other expenses, like medical bills, home improvements, or even vacations. College tuition is another common use for this extra loan money.

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 loans out there and you can always use the money for whatever you want. However, you will need outstanding credit to be approved for a second mortgage, so bear this in mind before you apply. Restrictions on lending are much tighter than they used to be.

A closed end type home equity loan gives you a big chunk of money immediately, but 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 payments for 10, 15, or even 30 years. As you pay off the loan, the amount you paid becomes available to borrow again. It’s kind of like using the equity in your home as a credit card.

So why is this type of loan called a second mortgage? Because you are adding yet another loan payment that uses your house as collateral and adding another monthly payment to your housing expenses. It’s tempting to use this for easy access to funds for important things, but be sure you can afford it before you take one out. Your house can be foreclosed on for defaulting on a second mortgage just as well as it can for defaulting on the first one.