Second Mortgages Explained: What Is A Second Mortgage

In: Guides

30 Jun 2010

A second mortgage is a loan that is given by a lender that is secured against the home itself and is superceded by the first mortgage. Any mortgage that is given out against the owner’s equity in the home in addition to the existing mortgage is automatically considered a second mortgage.

If an owner is unable to make his debt repayments on his loans and is forced into foreclosure the holder of the second mortgage will not receive any money against their note until the first mortgage has been completely paid out.

Being a second mortgage holder is a more risky business model and generally requires the borrower to pay a higher interest rate than they do on their first loan for this increased risk.

Key Differences Of A Second Mortgage

  • Second mortgages are usually lent for a shorter period of time (typically less than 15 years)
  • Second mortgages can sometimes require a large “balloon payment” at the end of the repayment period that doesn’t happen in a fully ammortized first mortgage
  • Due to the increased risk to the lender the second mortgage loan has a higher interest rate than first loans, as mentioned earlier
  • Second mortgages can be used to consolidate other debt payments (like credit cards and other high interest debt) into one payment with a lower interest rate

Most Popular Types Of Second Mortgages

  1. Home Equity Loan – This is the traditional type of second mortgage where the entire loan amount is given out in a one time payment (typically a single cheque) followed by a regular monthly repayment schedule at a fixed interest rate.

    Home equity loans can be used for a variety of things from debt consolidation, home remodeling, funding a child’s university education or other large purchases requiring a large lump sum of money. The key here is that the home equity is securing the loan unlike a credit card loan for example where the loan is unsecured.

  2. Home Equity Line Of Credit (HELOC) – This other popular type of second mortgage is quite a bit different in form than the home equity loan. As the name implies you will not receive a lump sum payment but a line of credit secured against your home’s equity. In fact it’s possible you may never even use any of the money in a HELOC depending on your reasons for getting it.

    The line of credit type of second mortgage is money that you can borrow at a future time as needed. The amount of credit available in the HELOC does not change and can be used all at once or in several small amounts spread out over many months or even years.

    The interest you are charged on a home equity line of credit is typically tied to the prime interest rate and is usually the prime rate + a certain number of percentage points. For example, you may get a HELOC with an interest rate of prime + 6%. This mean is the prime rate is 5% your interest payments will be 11%. As the prime rate changes your interest rate will also change.

    If you apply and get approved for a $100,000 home equity line of credit you could use $20,000 to go buy a boat. A few months later you could then spend $40,000 to add a room to your house. Perhaps you run up a large bill on your high interest credit card, you could use the HELOC credit to pay it off. There are many uses for a HELOC just don’t get in over your head as this is still debt and should not be treated as cash or a piggy bank to be raided.

Be Careful A Second Mortgage Is Still A Debt Product

Second mortgages used to be frowned upon as a signal that the borrower was in distress with their finances but this stigma has disappeared in recent years as competition has steadily dropped rates and made these products more competitive and common.

Second mortgages are used as a way to tap the equity home owners have built to secure a loan to; purchase big ticket items or consolidate high interest debts among a myriad of other uses.

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  • A Niyazi
    I can't advise you to lock in your loan at 7.35%!!! Interest rates today for the lenders are much much lower, in fact a 5yr loan rate is closer to 1/2 what you are being offered. 3.34% is more like reasonable for a locked rate and 2.00% is now available for the unlocked or variable rate. That is less than 1/2 of what you are being offered. Please do not hesitate to contact me at your convenience to discuss your options, you could be saving a lot of money per month!
    Abraham Niyazi
    Mortgage Agent
    Lic# M08010640

    Propertysold.ca
    Centum One Financial Group Inc.
    Lic# 10758
    Cell: 416-993-4082
    Office: 1-866-RATE-708 x 115
    Fax: 1-877-EASY-919
    abraham.n@propertysold.ca
    a.niyazi@easyrate.ca
    www.easyrate.ca
    www.centum.ca/abraham_niyazi/
  • s it safe to leave a home equity loan unlocked?
    I have a home equity loan for $100,000 locked at 7.25%. I decided to unlock it for $200 and relock it a a lower rate, only to discover the new rate was 7.35%. If I leave it unlocked the current rate is 5.49% (prime minus 0.51%). I had short term money in the 1980's at 18-21% and cannot afford that now. Could this happen again? Is it safe to unlock this money and leave it unlocked? Or should I stay with the current locked rate?
  • A Niyazi
    It sounds like your loan is with a lender that is not offering today's low rates. If your loan is unlocked that means that you have the ability to move it to a lender that provides better rates that what you have quoted above. For example Prime rate today is 2.75% and a couple of lenders are offering Prime - .75% right now = 2.00%!
    Even fixed rates are much lower than you mentioned at 3.34%.

    I would love to discuss your available options and save you quite a bit on your monthly payments as a result. Todays rates are 1/2 to 1/3 of what you have currently, that is a lot of savings per month! Please do not hesitate to contact me at your convenience.

    Abraham Niyazi
    Mortgage Agent
    Lic# M08010640

    Easyrate.ca
    Centum One Financial Group Inc.
    Lic# 10758
    Cell: 416-993-4082
    Office: 1-866-RATE-708 x 115
    Fax: 1-877-EASY-919
    a.niyazi@easyrate.ca
    www.easyrate.ca
    www.centum.ca/abraham_niyazi/
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