Second mortgage: what is it? How does it work? What are their benefits?

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What is the second mortgage benefit? this is the important part of this article that we will explain to you.
The first part explains what a second mortgage is and why it is named as it is. The second part goes into detail about the amounts you can borrow and the form in which you can borrow (the standard home equity loan and the line of credit) and their advantages and disadvantages, and a couple of tips on how to increase the value of your equity. The third part is the overall benefits and drawbacks to this type of loan which includes the higher amount one can borrow, the lower interest rate, etc. The fourth part explains some of the more common uses of this type of loan and the risk involve in said uses.

second mortgage benefit

What is a second mortgage?

A second mortgage is a type of loan that you take based on the value of your property. It’s called a second mortgage because usually, it’s a loan you can get even if you still have another loan on said property. Usually, said the first loan is a purchase loan.

The main defining feature of a second mortgage loan is that same as the loan you took to purchase the property; the second mortgage uses your property as collateral. In effect, you are saying I will pay you back even if I must sell my property.

How does it work?

Second mortgage loans can provide a large amount of money, even up to 85% of your home equity. Home equity means the actual value of the property. And By true value, we mean the amount of money you can sell the house for minus the amount you owe due to the purchase loans.

For example, if you’ve purchased the house for 500000 $ and have taken a 200000$ loan, your home equity will be 300000$. This amount can be in the form of lines of credit or a simple home equity loan as in a lump sum amount. Each of these has benefits and drawbacks:

Second mortgage requirements | A Guide to Second Mortgages

Standard second mortgage loans (lump sum)

the standard form of second mortgage or home equity loan is a lump sum loan. this means the lender will hand over the entire agreed-upon amount for you to do with as you wish. You often pay a fixed amount every month with this type of loan. This fixed amount makes planning for your monthly repayment much more straightforward. As you pay off your loan, you pay a part of the interest and a portion of your loan balance.

Repayment for home equity loans typically ranges between five to thirty years. This extended period is one of the second mortgage benefits. And if you cannot repay this debt, the lender can take and sell the property to recoup their losses. The lump-sum is best for those who have a stable source of income that can be used to repay the debt.

Lines of credit loans

It’s possible to use a line of credit when you borrow the money. Usually, with this type of loan, you can borrow as much or as little as you want. Your lender sets a maximum amount based on your equity and the rate that has been agreed upon beforehand. Much like a credit card, you can borrow and repay several times.

One of the benefits of a second mortgage line of credit loan is that you can borrow as little as you want and thus keep the monthly repayments much lower than the lump sum type. The drawback to this type of loan is the variable interest rate which can cause some unpredictability during the repayment period. Typically During the first period, borrowers only have to pay the interest, and because of this feature, they can quickly get in over their heads and borrow too much. So this type of loan is best for the more disciplined borrowers. Keep in mind that this loan has the same risk as to the lump sum type, aka foreclosure and loss of the property

Equity can increase or decrease over time ideally; it largely depends on matters outside of individuals’ control, such as the market, the general economy, etc. this doesn’t mean that there isn’t anything the owner can do to raise the value of the property:

1: as long as you are making monthly payments on your loan, you are reducing the amount you owe and thus increasing the actual value of your property

2: if you make improvements on your property, you are naturally increasing the value of your house and increasing your equity

Second mortgage benefits

Your home equity is an asset, and like all assets, it can be used. How you use said asset will determine whether it will bring you profit or waste your resources. One of the second mortgage benefits is the amount you can borrow. As we said before, this amount is significant, mainly because it’s secured by putting your property as collateral. Doing so allows the lender to feel more secure lending your more substantial amounts of money.

second mortgage benefit

Another one of the second mortgage benefit is the lower interest rates compared to other forms of loans. This is possible by reducing the risk to the lender by having secured the loan. In other words, the lender can’t demand more interest because the borrowers have put the house as collateral and have committed to paying back the lender one way or another. Because of these lower-risk loans (to the lender), the interest rates on second mortgages are lower than the unsecured loans such as credit cards.

And for those more law savvy and risk-takers of you, dear readers, there is another second mortgage benefit, and surprisingly it comes from the tax law. You might be able to take a mortgage interest deduction for the interest that you pay on the second mortgage.

There are a lot of intricacies that you must watch out for. So, it might be best to discuss the matter with a professional in this field, such as a tax preparer, before you do anything. For example, as of 2017, the laws regarding tax cuts state that unless you use the loan for “substantial improvements” to your property, you can’t use these expenses as a tax deduction. Where there is the second mortgage benefit, there are drawbacks too.

Drawback 1

One of the biggest problems with this type of loan is the risk of foreclosure. That means if the worst-case scenario happens and you stopped making payments, your lender can now take your property through foreclosure. This is one of the reasons that you should take this type of loan very seriously and with a solid plan. Using this loan for things such as entertainment or regular expenses is not sustainable, and we suggest you think it through. This is a big decision that will affect your future.

Drawback 2

Second mortgage loans can be rather expensive, much like purchase loans. There are numerous costs such as credit checks, origination fees, appraisals, closing costs, etc. Closing costs alone can be as much as thousands of dollars. Even if you are promised fewer such costs, you will still be paying them. It just means they wouldn’t be as obvious.

Drawback 3

Obviously, any time you borrow, you will be paying interest; otherwise, why would the lender lend the money?

Second mortgages typically have lower interest rates than credit cards, but they are still more expensive than your first loan.  it makes sense since the second mortgage lender is taking more risk than the first one and will be the second one to get paid in case of foreclosure (its basically first-come, first-serve, the first loan gets paid back first)

Typical uses of these types of loan

The best type of use for a second mortgage loan is a way to increase the equity of your property. Not only will you be raising the true value of your property, but you will also get to enjoy said improvement as well. As we said before, in second mortgage benefits, you might even be able to register such expenses as a tax deduction. Here are a few typical uses of second mortgage loans:

Typical uses of these types of loan

Home improvement

Renovations are one of the more common usages of these funds. Most who do this type of improvement usually plan on selling the house at a higher sales price.

Debt consolidation

You can lower the interest rate on your purchase loan but keep in mind that by doing so, you are putting your property as collateral, and if the worst-case scenario happens, you might very well lose the said property.


One of the uses of this type of loan is an investment. For example, you can invest the money in your education and ensure a future with a higher income job. However, in that case, you might want to consider student loans if they are possible. Property investment is another one of the uses; however, it is somewhat risky as a downturn in the market could lower the price of both properties.

Medical bills

Nothing is more important than health; one of the common uses for this type of loan is to pay off medical bills. Before you commit to one place for the loan, you should first research different sources to get the best possible deal you can. Here are some examples of such sources:

  1. A local bank or credit union
  2. A mortgage broker
  3. Online lenders

If you carefully thought this through and decided on this course of action, you’ll want to start by making sure you have some home equity. Typically, you need at least 15 to 20 per cent equity in your property.

Next is your credit scores; you might want to dispute any mistakes you might discover and generally make sure you have the best credit score you can because the rate you will get will be affected by this score. Like every other prosses involving paperwork, it’s best to get your document ready and organized in a single place; doing so will make the process much easier and a lot less stressful.

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