A second mortgage can be a home equity loan or a home equity line of credit taken out in addition to a regular mortgage. Clients obtain second mortgages in order to pay for home improvements, consolidate personal debt or to reduce the down payment on their primary mortgage.
A second mortgage is another loan taken out on a property in addition to a first mortgage. It is also commonly referred to as a home equity loan or line of credit.
Technically, the term “second mortgage” refers to the actual lien position on the property. A home equity loan is disbursed as a lump sum, while a home equity line of credit is a revolving line of credit.
You can take out a second mortgage after you’ve built equity in your home, usually through paying down a portion of the outstanding principal on your first — or primary — mortgage. Common reasons to apply for a second mortgage include large expenses like medical bills, tuition, home remodeling, debt consolidation, and major purchases like cars.
Your first mortgage is referred to as the primary mortgage because it will always take precedence. In other words, if you were to default on your home loan, you would have to pay off the first mortgage first.
When you apply for a second mortgage, you’ll likely find that interest rates are higher than they are on your primary mortgage. This is because your loan is secured by the same collateral — your house — as your primary loan, creating more risk for a lender. To offset the risk, lenders will generally charge higher interest for a second mortgage. However, the interest rate on a second mortgage may still be more competitive than other forms of credit like personal loans and credit cards.