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How Does a Second Mortgage Work?

You might have heard about second mortgages, either through someone you know having one or advertisements for them. As a homeowner, you understand the terms of your own mortgage, but what exactly is a second mortgage and why would you need one? There are times a second mortgage is beneficial, and it can really help you out with emergencies. In order to determine if this is the best option for you and your family, you must understand exactly what a second mortgage is and how it works.

What, exactly, is a second mortgage?

A second mortgage is a loan, an additional mortgage, taken out on a property where there is currently an existing mortgage. Most times the second mortgage is taken out with a lender different than the one who holds the first one. When you take out a second mortgage you will be making monthly, or bi-weekly, payments on the second mortgage at the same time as making payments on the first one so it doesn’t mean the first mortgage goes away.

How much can I borrow?

Your first mortgage amount was borrowed to cover the cost of the purchase price of your home, and perhaps including some money for renovations. A second mortgage works a little differently than that. The value of your home will change with the market, and the amount you owe on your mortgage will decrease as you make payments. The difference in those two amounts is what’s known as home equity. That equity will determine how much you can borrow for your second mortgage. The total value of your first and second mortgage cannot exceed 80% of your home’s total value. So, for example, if your home is valued at $400,000 and you owe $100,000 on your first mortgage. This means that your second mortgage could be up to $220,000.

How do I qualify?

There is some importance put on having a good credit score, but when it comes to a second mortgage lenders tend to care more about the amount of equity you have in your home and here’s why. If you default on your mortgages, your home will go into foreclosure. The lender that holds the first mortgage has first say at the money your home sells for. So the less you owe on your first mortgage (and reversely the more equity you have in your home) the more likely the second mortgage holder is to get their full payout and not have to compete to recoup their losses.

What are the terms?

The terms of a second mortgage are often not the same as your first one. For example, they may only have a term of 2 years for you to pay back the money depending on how much you borrow. If you cannot pay it all out at the end of the term you may need to take out another second mortgage to pay it off. You will have regular payments, scheduled either monthly or bi-weekly with your lender so that you can predict what you’re going to pay.

 Why do I need one?

Many people get a second mortgage to consolidate large amounts of consumer debt and pay it off at a lower interest rate. They also use a second mortgage to pay for big renovation projects or unexpected medical emergencies. Your lender may ask why you’re looking for one, or they may not. If you have the equity in your home, typically the choice is yours as to whether you want to borrow the money.


If you would like to learn more about second mortgages and perhaps get one for yourself, contact the team at 1Onefund Financial today.

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