What is a Second Mortgage?
Also called a home equity loan, a second mortgage is secured by the equity in a house. Equity equals the value of the house less the balance owed on the homeowner's mortgage.
Second mortgages are not the same as home equity lines of credit (HELOCs).
How Does a Second Mortgage Work?
Second mortgages are similar in concept to traditional mortgages. For example, second mortgages generally must be repaid over a fixed period. Some lenders may offer fixed rates on these loans; others might offer variable rates.
Like first mortgages, most banks will also charge points and other fees for generating the second mortgage (attorney fees, title fees, insurance and documentation fees, for example), and these costs vary by bank. In some cases, the lender might charge a fee if the borrower prepays the loan. And because the loan is secured by a house, if the borrower defaults, the lender may foreclose on the house.
Why Does a Second Mortgage Matter?
Second mortgages can be viable options when compared to credit cards or other high-interest, unsecured loans. In addition, mortgage interest is tax-deductible, making the interest rates on second mortgages sometimes lower than they appear when one considers the tax savings.
However, not all second mortgages are created equally. Borrowers are well served to compare fees, interest rates, and repayment terms among lenders. After all, when a borrower defaults, his or her home could very well end up belonging to the bank for good.
