Second Mortgages

A property can have several different loans against it and the loan which is registered with officials first is referred to as the “first mortgage”. So, surprisingly enough, the second loan against the property is then referred to as the “second mortgage”.  A second mortgage, as the name implies, is a secured mortgage that is subordinate to another loan against the same property. Generally,a second mortgage takes the form of a home equity loan and, from a financial standpoint, the two words are practically the same. The difference in terminology, however, is that a mortgage traditionally refers to the legal lien instrument, rather than the debt itself.

The word “subordinate” is used because if the loan should enter into default, the first mortgage gets paid off before the second mortgage. Second mortgages are therefore much riskier for a lender and, accordingly, higher interest rates are usually charged.

Consolidating high interest debt is a common use for a second mortgage, which may lower your monthly payments, convert compound interest on credit cards into a simple interest mortgage, and possibly change the interest on monthly payments into a new tax deduction.  Also, if you are faced with the possibility that you may lose your principal source of income, for whatever reason, you may want to consider a home equity loan/second mortgage as a financial safety net. Generally, when considering the application for a second mortgage, lenders will look for the following: 1) significant equity in the first mortgage; 2) low debt-to-income ratio; 3) high credit score; 4) solid employment history.

The interest rate and monthly payments remain fixed for the full term of a second mortgage, which is usually made available in 5 year increments, with your available choice ranging from 5 to 25 years. Fully amortized second mortgages are designed to be completely paid off at the end of the designated mortgage term, with no balloon payment due at the end.  The full second mortgage loan amount, minus closing costs, is paid to the borrower at the time of closing, unless there is an agreement to pay any third parties directly.

Second mortgages can be as high as 125% of the appraised value of your home. However, borrowing more than your home is worth could leave a balance due if you decide to sell your home. Also, the tax deductible interest is limited to the lesser of 100% of value, or $100,000.