How Do Second Mortgages Work?

A second mortgage is a fixed rate, simple interest, installment loan, recorded as a lien on the property title deed behind the existing first mortgage. Equity in your home can be accessed without refinancing the current mortgage, which can save money on costs, and retain an existing low rate.




The guidelines can vary depending on the lender, some may have a limit of 80% loan to value, while others may offer loans up to 100% of value. Homeowners who have little, or no equity, may be able to qualify for cash out, but good credit is the key to a high loan to value second mortgage program. Also, see FHA loans as an alternative for a high loan to value, or lower credit scores.

The cash out from a second mortgage can be used for any purpose. Paying off high interest debt is a common use which can provide several benefits, such as: reducing monthly payments, changing compound interest into simple interest, and saving money from a possible tax deduction.

Second mortgage rates can be influenced by a number of factors such as: credit scores, the amount of the loan requested, debt to income ratio, your disposable income, and the value of your home.

Payment terms are usually offered in 5 year increments, which can range from 5 to 30 years. Fully amortized, fixed rate second mortgages are scheduled to be paid off at the end of the designated term as specified in the loan documents, with no balloon payment due.

Second mortgage interest payments may be tax deductible for a primary home, with a limitation for the deduction set at the a maximum of $100,000 or 100% of value. Check with an advisor.

The full second mortgage balance, minus any closing costs, is paid in one lump sum at the close of the loan process, unless there is an agreement to pay any third parties directly. For example, a lender may require some borrowers to pay off certain debts in order to meet the debt to income ratio. Also, if you have a line of credit or home equity loan, it must be paid off with the new loan.