How Do Second Mortgage Loans Work? 

A second mortgage loan is a financial tool that allows you to use the equity in your home. This gives you the needed cash to work on other projects and goals, using your home as collateral. Homeowners often use this type of loan for home improvements, debt consolidation, or to make large personal purchases such as paying for higher education.   

You’ll Have Two Mortgages on Your Home

When you take out a second mortgage loan, your first mortgage remains intact. However, the new mortgage is taken against the home equity or the difference between the home’s current market value and any remaining mortgage payments. 

Types of Second Mortgages

There are two main types of second mortgages:

1. Lump-Sum or Home Equity Loan: a one-time payment of your home equity with a fixed interest rate
2. Home Equity Line of Credit: a pre-approval to withdraw as needed from a pool of money (with a borrowing limit) with a variable interest rate. 

What Are the Benefits of a Second Mortgage?

The benefits you get from your home equity varies depending on the terms of your loan. However, common benefits include: 

• Lower interest rates than other types of debt
• Access to a significant amount of cash
• Potential tax benefits if used for substantial improvements to your home

Why Should You Not Get a Second Mortgage? 

While there are benefits, accessing your home equity can have disadvantages such as: 

• Risking home foreclosure
• Second mortgages can be expensive
• Interest rates are often higher than your first mortgage

Think Carefully About Your Decision

Ultimately, when you take out a second mortgage, you are putting your home up as collateral. If you meet financial difficulty, you are at greater risk of losing your home. Additionally, it can also put a strain on your income, making you more vulnerable to a financial crisis. You want to think carefully before applying for this additional type of financing, keeping in mind your current financial situation as well as your need for tapping into your home equity.

Learn More about Second Mortgage Loans

Understanding how much home equity you have and whether this or not this is the right financial tool for you can be confusing. Our loan officers at Mortgage Solutions Financial are ready to help you get the answers to your questions. Contact us today to figure out if a second mortgage is the right move for you.