Second Mortgage: Working and Advantages

Many people apply for home loans and mortgage to buy their desired home. Since we all know that your home is your valuable possession and that value increases with time. Therefore, your home is your asset. A second mortgage loan allows you to borrow against the worth of your house for indulging in some new ventures. A second mortgage loan is also referred to as Home Equity Line Of Credit (HELOCs) or a home equity loan because it enables you to borrow against the equity of your home. In short, you can use your home for investing in other projects and goals without having to sell it.

What is a Second Mortgage?

A second mortgage is basically a subordinate mortgage made while the first is still in effect. The second mortgage receives repayments only when the first loan has been paid of. So it is regarded as collateral, similar to the one that you used in purchasing your house. You must know that the rate of interest imposed for the second mortgage tends to be higher and the amount acquired will be lower as compared to the one in the first mortgage. 

Second mortgage dives into the equity of your home, which could vary depending upon the time but eventually, it grows over time. Several things can change equity. They are discussed below-

  • Equity increases when you make monthly payments on your loan and reduces the loan balance.
  • Equity increases when you make improvements in your home based on the strong real estate market that increases the value of your home.
  • Equity decreases when you borrow against your home or when your home loses its value.

Forms of Second Mortgage- A second mortgage comes in various forms so you must talk to your reliable mortgage broker before committing to one. Let’s have a look-

  • Lump-Sum- It provides lump-sum money to use for the new project that could be paid in the form of fixed monthly payments. With each payment, you pay for a portion of your loan balance and interest coast known as Amortization.
  • Line of Credit- You can borrow using the line of credit or a pool of money from where you can draw. Your lender will specify the borrowing limit and you can continue to draw until you reach a maximum borrowing limit.
  • Rate Choices- Rates may vary depending upon the type of loan you choose. A fixed-rate interest loan will not change, while the variable-rate interest will change according to the market value.

Advantages of a Second Mortgage-

1) Loan Amount- The second mortgage allows you to borrow a significant amount based on your property. Though acquiring the amount depends on your lender but, you can borrow about 85 per cent of your home’s value.

2) Interest Rates- The second mortgage provides a lower rate of interests since securing the loan with your home reduces the lender’s risk and helps you achieve interest rates in single digits.

3) Tax Benefits- There is a possibility of deduction in your mortgage interest with the second mortgage.

Leave a Reply