What Is Second Mortgage?
By Ajay Pats, Fri Dec 9th
What is a second mortgage?
A second mortgage is a loan that is secured by the home itself,and subordinate to the first mortgage. Any mortgage taken outagainst a home in addition to an already established mortgageautomatically becomes a second mortgage.
As the name implies, second mortgages are secondary to firstmortgages. This means if the homeowner is forced intoforeclosure, the second mortgage holder will receive no proceedsfrom the sale of the home until the first mortgage has beencompletely repaid.
Characteristics of a typical second mortgage: Since the lender'srisk is higher, second mortgage loans carry a higher interestrate than first mortgage loans. Second mortgages are typicallyshorter in duration (usually 15 years or less). A secondmortgage may require a "balloon" payment at the end of therepayment period. This one is a biggie: the interest paid on asecond mortgage is tax deductible in most circumstances!
Primary types of second mortgages:
Home equity loan - This is the traditional type of secondmortgage. There is a one-time disbursement of the loan funds (ina single check) followed by a period of regular monthly paymentsand a fixed interest rate.
Home equity loans are often used to consolidate debts, remodelthe home, fund a college education, purchase a big ticket itemsuch as an RV, or most anything that requires a large amount ofcash. Line of credit - This type of second mortgage is verydifferent from a home equity loan. With a line of credit, youdon't receive a large check for the full amount up front. Youmay never even borrow any actual money from it at all!
The interest and payment on a line of credit second mortgage canand does change periodically. The interest is typically tied tothe prime rate. The actual interest rate will be the prime rate+ a certain number of percentage points.
For example, your loan specifies that you will pay the primerate + 5%. If the prime rate is currently 6.5%, the interestrate on your loan will be 11.5%. The interest rates will beevaluated periodically, and if the prime rate has changed, yourinterest rate will change along with it. Of course your monthlypayment will also change accordingly.
A line of credit second mortgage is just that: an amount ofmoney that you can borrow at a future date as needed. Thisamount is available to you all at once or in several smalldisbursements spread over many years.
For example, you apply for and get approved for a $50,000 lineof credit (secured by a second mortgage on your home). You canborrow the entire $50,000 at one time.
Alternatively, you can wait a few months and borrow $20,000 fora new car. A few months later you can borrow $6,000 to add aroom to your house. Later still, you can borrow another $3,000to pay off a credit card bill.
So far you will have borrowed $29,000, meaning that you have$21,000 left on your line of credit that you can borrow later ifyou need to.
Conclusion
Second mortgages allow homeowners to tap the equity in theirhomes to purchase expensive items, pay of debts, or mostanything else.
Home equity loans are usually used to fund a present need whilelines of credit are often established for use at some time inthe future.
It is very important that you use a second mortgage wiselybecause if you get into financial trouble you can potentiallylose your home. But if used properly, a second mortgage can helpyou enjoy a better lifestyle, now and in the future
About the author:Ajay Pats is a professional manager.He manages real estatebroking site "Real estate broker"(http://realestatebroker.nexuswebs.net/realestatebroker/index.html),community for home based business entrepreneurs"Venturecon/Home businessopportunities"(http://groups.msn.com/venturecon) andinspirational ezine "Discover secrets of happy and prosperouslife"(http://www.topica.com/lists/venturemall).
