Mortgage Loans

A second mortgage uses the same house as pledge for obtaining a loan from the mortgage lender. Since the same house functions as collateral for the primary mortgage, the primary mortgage lender has prior claim on the house in case of default. This makes the secondary mortgage lender’s position somewhat unenviable. Hence, the second mortgage carries a higher rate of interest than the primary mortgage.

The loan is provided depending on the amount of built up equity on the house. The built up equity on the house is the difference between the market cost of the house and the amount of mortgage payments due on the first mortgage. In other words, a borrower needs to have sufficient equity on the house in order to obtain a second mortgage. In case the equity on the house is negative, it is unlikely that the lending establishment will be willing to provide a second mortgage loan. The loan to value ratio is calculated by dividing the payments, due on the first and second mortgage, by the appraised value of the house. A higher loan to value ratio is unfavorable. A traditional second mortgage is a fixed rate level payment mortgage that has to be discharged over a period of 15 or 30 years.

A second mortgage can be used for debt consolidation or home improvement purposes. Debt consolidation refers to paying off multiple loans with a single loan having a low rate of interest. Debt consolidation may be especially useful for people who are laden with credit card debts. Consolidation may be a successful strategy for people who are able to obtain a HEL, as a HEL has a low-fixed rate of interest as compared to credit cards that carry a much higher APR (Annual Percentage Rate).

Also, a second mortgage can be used for necessary home improvements. People who need money, for making remodeling or improvements on their home, can try and obtain a HELOC. A HELOC allows a person to avail loans as and when required and pay a floating rate of interest on the amount borrowed.