A second mortgage is an additional loan taken on a property that already has an existing mortgage on it. The second mortgage goes on the property’s title along with the first mortgage. In the event the homeowner defaults on either mortgage, the lender of the first mortgage is always paid out first, whereas, the lender of the second mortgage is entitled to whatever is left over after paying the first lender. As such, the lender of the second mortgage carries a higher risk of not being paid in full, and to compensate for the additional risk, always charges a higher mortgage rate than that of the lender for the first mortgage. It is important to note that mortgages are categorized as first or second based on the dates they were registered on title and not the amount of each loan. The amount for a second mortgage may be greater than the amount for the first mortgage.
Second mortgages are commonly used to consolidate debt or take-out equity in a home. Although, this can also be accomplished by way of a refinance, the reason why some borrowers need to choose a second mortgage over a refinance is due to weak credit, little equity in the property, or inability to break the first mortgage prior to the term’s maturity. Like in a refinance, lenders for second mortgages will lend up to a maximum of 80% of the home’s value minus the outstanding mortgage amount on the first mortgage. For example, if a property’s value is $1 Million where the first mortgage’s outstanding balance is $200,000, then a lender on a second mortgage would be willing to loan up to $600,000 (there are some private lenders for second mortgages that will go above 80% of the home’s value).
The most affordable type of second mortgage is a home equity line of credit and, as such, have the highest qualification standards. To qualify for a second mortgage, lenders will look at 1) the amount of equity in the property, 2) the borrowers’ income in order to evaluate whether they can make their payments on time, 3) credit scores, and 4) the saleability of the property.
Not all lenders offer second mortgages due to the higher risk. Apart from the home equity line of credit mortgage product offered by the major banks and major monoline mortgage lenders, the most common lender for a second mortgage is a private lender.
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