What is a Second Mortgage

In real estate there are multiple types of loans homeowners can take out against their property. The original is typically referred to as a mortgage or the first mortgage and as the name implies it is the first loan you take out to finance a piece of property. Recently, however, lenders and banks have started offering second loans against a property or second mortgage loans with low interest rates. What was once frowned upon and evidence of financial hardship has become common practice and people from all classes have welcomed in the opportunity to get a second mortgage.

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A second mortgage loan follows most of the same guidelines as the first mortgage. The loan is based on your home’s equity and can include a fixed or variable rate for a fixed amount of time. Some of the more popular reasons for deciding to take out a second mortgage include financing home improvements, paying off credit card debt, saving for college tuition fees, or paying for emergency expenses.

Home Equity Loan vs HELOC

There are two types of second mortgage loans, a traditional second mortgage loan or home equity loan and a home equity line of credit or HELOC.

The main difference between these two types of loans is the way you are able to access the line of credit. A home equity line of credit (HELOC) has an open-ended line of credit or a revolving line of credit similar to a credit card. You can borrow any amount whenever you need to as long as that amount does not go over your credit limit. Also, you only have to pay on the amount you borrowed, not on the whole amount available. This loan is practical for dealing with unexpected expenses and is typically tax deductible.

A second mortgage or closed-end home equity loan is different than a HELOC in that the loan is usually for a fixed amount and for a set amount of time. These are similar to first mortgages and are practical for putting towards home improvement expenses, college tuition financing, or to pay off other debts.

In either case it is important to remember that you are borrowing against the equity of your home. With your home as collateral you risk foreclosure if you cannot repay the loan, meet it’s requirements or find other means of refinancing. With interest rates at historic lows and with the opportunity of using interest as a deductible, HELOC loans and second mortgage loans have become more popular than ever.

Now is a good time for refinancing but make sure you check all your available resources so you can choose the best mortgage loan for you.