Second Mortgage

A second mortgage is typically a secured loan that is a subsidiary to another loan on the same property. In real estate, multiple loans on the same property are not unheard of. A property can even have a third, fourth or fifth mortgage, though these loans are rare. Second mortgages are subordinate in the sense that if the loan’s legal requirements are not met by either defaulting in paying a scheduled payment or there has been a violation of the loan covenant, the first mortgage is paid off first. Due to their financial position, these mortgages carry a higher risk for lenders, and will usually come with a higher interest rate than the first mortgages.

In most cases, second mortgages come in form of home equity loans. In effect, in financial settings there is little difference between second mortgages and home equity loans. A borrower as collateral uses home equity loans. They help finance such things as medical bills, college education or major home repairs. These loans reduce the actual home equity, and can sometimes be held as first or third mortgages. Being secured against the value of the property, they are thus regarded as second mortgages. A second or a home equity loan can have varying lengths, with some lasting as long as 30 years. Depending on the loan structure however, repayment may be required in as little duration as under a year.

Sometimes, a second mortgage may occasionally act as a catalyst to a foreclosure when the property owner defaults on a loan payment or violates a certain loan requirement. The primary mortgage holder is now in a position to foreclose the property and allow the second mortgage lender to go for the deal while leaving the homeowner at the mercy of the second mortgage holder. When considering mortgage applications, lenders will look at such factors as low debt-to-income ratio, high credit score and significant equity in the first mortgage and solid employment history. Second mortgages can be tempting because one can get large amounts of money. However, one should keep an eye out as these may come with a number of pitfalls.

One of them is the first rate that is offered. This is because second mortgages have default penalties that can prove costly when a payment is missed or delayed. In fact, a simple clerical error can increase the interest rates dramatically. Alternatively, if one decides to default in the second payment and walk out of the deal, it may come with stiff pre-payment penalties that may leave one with a hefty payment in order to be scrapped off the books. Some of these mortgages start out in easy-to-afford payments and end up with a huge payment at the end. Reading contract details carefully before signing anything will ensure that one does not fall into that trap. In some cases, application costs for the second mortgage may not be refundable while others may require closing costs for a title search or other miscellaneous fees that may use up considerably the initial planned payment. It is thus wise to consider all the underlying factors before deciding to apply for a second mortgage.