MortgageA second mortgage, also known as home equity line of credit (HELOC), is simply a second loan on your house. As with your existing mortgage, your home will secure your second mortgage. This means that your lender could legally take your home if you default on your mortgage. When this happens, your lender will sell your home to pay off your original loan and the remaining money from the sale (if applicable) will then go into your second mortgage.

Second Mortgage Basic Facts

Shantel Matagi and other lending institutions noted that many homeowners nowadays are considering second mortgages since the mortgage rate they’re being offered are lower, even if the property values are higher.

  • Second mortgages come in two primary types: home equity loan and home equity line of credit. With HEL, your lender will provide you money in a lump sum, which you’ll have to pay off in a predetermined time period at fixed intervals. The interest rate is usually fixed. An HELOC, on the other hand, functions like your handy credit card so you can spend cash whenever you need it. The interest rate is usually adjustable.
  • The amount you can borrow will depend on several factors — how much equity’s in your home, your loan to value (LTV) ratio, and your credit rating. Most lenders won’t lend you more than 75% or 85% of the LTV ratio of your combined first and second loans.
  • You can’t simply use funds from your second mortgage for anything. Plenty of homeowners use their second mortgage for huge expenses like repaying debts, purchasing another home, paying for college tuition, huge medical expenses, or home renovations. Essentially, you wouldn’t want to take out a second loan if you’re just planning on spending it on a grand vacation or other unnecessary expenses since you’ll be risking your house in the event that you default on your loan.
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Many lenders offer second mortgages to qualified borrowers. With this in mind, you don’t necessarily have to take out a second mortgage from the same lender. The most vital thing to do is research your options, compare total fees and interest rates, and then decide which one will be best for your specific financial circumstances.