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A second mortgage is a loan which allows you to borrow money against the value of your property. Your property is an asset that may appreciate over time. Second mortgages, also known as “home equity lines of credit” or “home equity loans”, allow you to access your house’s value for other projects and aspirations without having to sell it.
- A second mortgage is a loan which utilizes your house as security, similar to the loan you used to acquire your property.
- Second mortgages provide many advantages including larger loan amounts, reduced interest rates and significant tax benefits.
What Is a Second Mortgage?
A second mortgage is a loan which, like the first mortgage, utilizes your house as security. The loan is referred to as a second mortgage since your purchase loan is often the first debt to be repaid if your property goes into default.
This implies that if the worst-case situation occurs and you cannot make your mortgage payments (and the lender sells your property), your first mortgage will be paid first. After the first mortgage is paid off, any residual money would be transferred to your second mortgage.
Second mortgages draw on your home’s equity, which is the market value minus any loan amounts. Equity may rise or fall, but it should likely rise over time. Equity may shift in several ways:
- When you make monthly loan payments, you lower your loan amount, which increases your equity.
- Your equity grows if your house improves in value due to a strong real estate market, or changes you make to your property.
- When your house loses value or you borrow against it, you lose equity.
Second mortgages can come in several different forms:
- Lump sum: A typical second mortgage is a one-time home equity loan which gives you a lump sum of money that you may spend as you wish. In a process known as amortization, you pay a portion of your interest expenses and a portion of your loan total with each payment. You will return the debt gradually over time, generally with set monthly installments with this form of a loan.
- Line of credit: It is also possible to borrow using a line of credit – a pool of money from which you may draw. You are never obligated to accept any money with this loan form, but you can choose to do so. Your lender establishes a maximum borrowing limit, and you may borrow (many times) until you hit that limit. You can repay and borrow like you would with a credit card.
Depending on the kind of loan and your choices, your loan may have a fixed interest rate which allows you to plan your payments for years to come. Variable-rate loans are also available and are the most common kind of credit line.