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What are Second Mortgages?

Second mortgages often have higher interest rates than first mortgages.
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  • Written By: Dan Blacharski
  • Edited By: L. S. Wynn
  • Last Modified Date: 07 April 2014
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A home may have multiple mortgages on it. Second mortgages are subordinate, meaning that in the event of default, the primary, or first mortgage would get paid off first, and then any funds remaining would be used to pay off any second mortgages. For this reason, second mortgages typically carry a higher rate of interest. Also, like first mortgages, second mortgages also carry closing costs and "points" that may make the total cost of the second mortgage more expensive.

In the most common type of second mortgage, a homeowner may borrow up to the amount of equity he or she has in the home. For example, if the owner has a home valued at $100,000 and currently owes $75,000 on the first mortgage, a second could be taken out for $25,000. Because this type of second is still 100 percent secured by equity, it is the easiest type of second mortgage to get, and will not be as expensive as other second mortgages that are not fully secured.

There are actually several types of second mortgages. A line-of-credit second mortgage is one in which the homeowner does not take cash out immediately, but instead, applies for a line of credit secured against the home, which can be used as needed.

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In some cases, a second mortgage is taken out at the same time as the first to help qualify for a new purchase. A borrower may, for example, qualify for a first mortgage that requires 30 percent down. If the borrower only has 20 percent, they may be able to take out a second mortgage for the additional 10 percent.

It is also possible to obtain a second mortgage in excess of your home's value. With a 125 percent loan-to-value loan, your total indebtedness can be 125 percent of the value of your home. This type of loan may be more difficult to obtain, and may require superior credit. A major disadvantage of this type of loan is that your interest will not be completely tax-deductible. Mortgage interest is allowed as a tax deduction only up to the amount secured by real estate.

The second mortgage is often an excellent option for obtaining needed cash, although in some circumstances, refinancing a first mortgage may be a better option. If the first mortgage was taken out when interest rates were high, refinancing the first mortgage will not only yield the needed cash, it will also very likely result in a much lower interest rate. When deciding between taking out a second mortgage and refinancing, consider what the transaction costs (closing costs) are, and investigate the relative interest rates. The results won't be the same for everybody. Whether refinancing or taking out a second mortgage yields the best bottom line will depend on your existing equity, credit rating, and other factors.

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Discuss this Article

anon323822
Post 5

I totally agree that taking out a second mortgage is a good option to get some needed cash.

Bhutan
Post 4

Oasis11- There are many options for a second home mortgage. There are HELOC’s, or a home equity line of credit that is a revolving account that works like a credit card.

Once you begin drawing from the account, the payment is set to be due at the end of the month. Here is usually a pay back period of ten to twenty years and often the home equity line of credit is a variable rate loan.

This loan can also be fixed but at a much higher interest rate. For example, I currently have a home equity line of credit set at 3.25%. If I were to set the loan at a fixed rate, my rate would rise to 8%. Although my loan is interest only, which means that my minimum payment does not goes toward the principle.

I do make additional payments and I rather take my chances with the interest rates because my current rate is very low.

You can also get a hybrid loan which is a second home mortgage product that offers a fixed interest rate for the first few years and then it goes to a variable rate for the remainder of the loan.

The other option is a fixed second home loan rate for the entire loan. This offers a much higher interest rate.

oasis11
Post 3

Sunny27- I agree with you it best to pay both loans.

I just want to add that if you are seeking a second mortgage loan or looking for second mortgage financing it is best to look at sites like Bankrate.

They offer information on the current market rates for second mortgage rates throughout the country.

Another option in seeking the best second mortgage rates is hiring a mortgage broker.

A mortgage broker should be able to tell you what the best market second mortgage interests are and what rate you are most likely to qualify for.

Sunny27
Post 2

Anon22844- I think that is a good question. Unfortunately, you would have to continue paying both mortgages because if you default on the first mortgage, the bank can begin foreclosure proceeding against you.

The main difference between the first and the second mortgage is that the second mortgage is a recourse loan, which means that even if you lose the property due to foreclosure you are still required to pay the second mortgage.

The bank in a second mortgage has a legal right to pursue you for payment. The first mortgage does not need to be paid back during a foreclosure. Usually when a house is sold, the first mortgage gets paid off and whatever is left goes to the second mortgage, but the bank can still require you to pay the missing balance.

This is the reason whey second mortgage rates are higher than a traditional home mortgage loan rate.

I hope that answers your question.

anon22844
Post 1

Can you stop paying on a first mortgage and still keep the house as long as you continue to pay on the second mortgage?

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