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Second Mortgage Consumer Guide

 
A second mortgage is an additional mortgage on a property that has already been mortgaged once.  Its settlement is secondary to the main lien.  There are several home loan variations that are sometimes referred to as second (or "2nd") mortgages.

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Here are three of the most common second mortgage types:

  • A home equity loan is a loan where the borrower's home is used as collateral, usually secondary to the first mortgage.  Home equity loans generally pay the borrower a lump sum amount; they often have fixed interest rates and fixed repayment amounts.  Homeowners, particularly the elderly and those with low incomes or poor credit, should be careful when borrowing money based on their home equity.  If you fail to make your home equity loan payments, perhaps because your income is insufficient to keep up with the monthly payments, you may lose your home.
  • A home equity line of credit is money in a loan account that can be used as you need it.  You can use any portion of it at any time and pay it back at any time.  The interest rate is usually variable and may be tied to the prime rate.  As with home equity loans, your home is at risk, and it is important to make loan payments on time.
  • A reverse mortgage is a financial instrument in which a home mortgage is transferred to a bank, from which the homeowner receives an annual or monthly income (or a lump sum amount).  Many older Americans are turning to reverse mortgages to pay for medical treatment, finance home improvements, buy long term care insurance, or supplement their incomes.  Note that a reverse mortgage can be structured as either a secondary lien or a primary lien.

Loan or Line of Credit?

If you need to consolidate high interest rate credit card balances or other loans, finance a college education, make home improvements, or cover unexpected expenses, a second mortgage loan or perhaps a line of credit may work for you.  The table below contrasts the key features of 2nd mortgages and home equity credit lines.

 

Loan

Line of Credit

Features
  • Lump sum amount.
  • Interest rate is fixed for the life of the loan.
  • Fixed monthly payment includes principal and interest.
  • Choose payback period from flexible maturity terms.
  • Borrow as needed; pay interest on the outstanding balance only.
  • Interest rate is variable.
  • Flexible payment terms.  Pay off the line at any time with no prepayment charges.
  • Access the credit line by writing checks up to your credit limit during the access period.

Market

 Persons who have current borrowing needs but do not foresee future ones. Persons who have a current need and would like to have a flexible line of credit for future uses.

Related Home Finance Websites

  • Home Loans
    This FTC real estate guide features an introduction and answers to frequently asked questions about home loans and mortgages.
  • Home Improvement Loans
    Learn how to finance home improvements with equity from your home.
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