A second mortgage, also known as a junior-lien, is a loan that you take out using your house as collateral while you still have another loan secured by your house. Second mortgages are often used to access the equity in your home, which is the difference between the value of your home and the amount you owe on your first mortgage. Here are some key features of a second mortgage:
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Types: Home equity loans and home equity lines of credit (HELOCs) are common examples of second mortgages. Borrowers who wish to take out second mortgages can choose between two basic types: home equity loans or home equity lines of credit.
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Interest rates: Second mortgages often carry higher interest rates than first mortgage loans because they are paid off second in the event of default.
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Loan amount: The amount you can borrow is limited by how much of your home you own outright. Some lenders allow you to take up to 90% of your homes equity in a second mortgage.
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Repayment terms: Some second mortgages are “open-end” (meaning you can continue to take cash out up to the maximum credit amount and, as you pay down the balance, can draw again up to the same limit) and other second mortgage loans are “closed-end” (in which you receive the entire loan amount upfront and cannot redraw after that) .
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Risks: By taking out a second mortgage, you are adding to your overall debt burden, which can make you more vulnerable in case you experience financial difficulties that affect your ability to repay your debts. Borrowing against your home means you’ll be putting it on the line; if you can’t make payments, you could lose it.
Its important to note that second mortgages can mean high loan amounts, and some lenders allow you to take up to 90% of your homes equity in a second mortgage. However, it can be expensive to take out a second mortgage, as you must pay the closing costs upfront, similar to a first mortgage. Before taking out a second mortgage, its important to consider the risks and make sure this type of financing will work well for your situation.
