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2nd Mortgage - Second Mortgage

When you are in the market for a home, you will hear different terms that you may or may not understand.  When you first buy your home, you will be getting a 1st mortgage, so what is a 2nd mortgage? 

 

A 2nd mortgage is actually an additional mortgage on your home.  For example, if you purchased a home that is now worth $225,000 and your 1st mortgage is $195,000, you may be eligible to take out a 2nd mortgage for the difference, or $30,000.  Often, this is called a home equity loan because you are taking out a loan based on the amount of equity you have in your home.  This type of loan is often done when major repairs are needed on the home, when something needs to remodeled, or when a person has a specific financial need.  

 

The homeowner would go through a mortgage refinancing process where the house will be assessed for the current value and the current amount of equity will be determined.  Sometimes you can only take out a portion of the equity.  For example, some loans require that you can't refinance a home for more than 90% of the actual value of the home. If you are approved for the mortgage refinance, you would then have two house payments that would be due every month.  Sometimes you can consolidate these into one loan, and sometimes you may be using two completely different lenders.  You should always pay for your first mortgage first. 

 

There are different options that are available when you are looking at a 2nd mortgage.  You may take the entire amount as a lump sum and pay it back at a fixed interest rate.  Another method is to take the 2nd mortgage as a home equity line of credit.  This works like any other line of credit or credit card because you simply pull out the money as you use it and pay it back as you go.  Many people like this option because the money is available when needed, but doesn't have to be used, and when it isn't being used, no interest is being charged. 

 

Because a 2nd mortgage holder is taking a bigger risk than the 1st mortgage holder, they often charge rates that are higher than those currently being charged for a first mortgage.  If you have poor credit and need a bad credit mortgage, a 2nd mortgage may not be the way to go because the interest rates will be even higher.  It would be a better idea to work on improving your credit before taking out a home equity loan.