Q & A: What is a Second Mortgage?
A second mortgage refers to a secured loan (or mortgage) that is subordinate (secondary) to another mortgage against the same property. Other names used could be “home equity loan” or “home equity line of credit.”
A property can have multiple loans (or liens) against it. The loan which is registered with the county first is called the first mortgage. The lien registered second is called the second mortgage. A property can have a third or even fourth mortgage, but those are more rare.
Second mortgages are called subordinate because, if the loan goes into default, the first mortgage gets paid off first before the second mortgage. Thus, second mortgages are riskier for lenders and generally come with higher interest rates than do first mortgages.
The length or term of a second mortgage can vary. Terms can last up to 30 years, but tend to average closer to 15. Repayment terms can vary; from “interest-only” for an initial period of time, to 5/10/15 year fixed rate/fully amortizing, to a balloon payment due within 5 years or more.
Generally, when considering the application for a second mortgage, lenders will look for the following:
- Significant equity in the property
- High credit score
- Solid employment history
- Low debt-to-income ratio
A second lien holder can foreclose when a homeowner stops making payments on the mortgage, even if there is no equity in the house. The second lien holder can foreclose even if the homeowner is making payments to their first mortgage holder. When a second lien holder forecloses, they do so subject to the first lien. The second lien holder may purchase the first mortgage (which may still be in good standing), but they are not required to do so. Regardless, if the second mortgage holder forecloses, this will result in the homeowner losing their home to foreclosure.
Should you have more questions about second mortgages or anything else related to home financing, please feel free to contact me.
Connie Hess, Senior Loan Officer
Affiliate Member, Homes for Heroes
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