Second Mortgage

What you need to know about second mortgages

A second mortgage is a type of home loan that is subordinate to the first mortgage that already exists on the property. In other words, if a home with two mortgages is sold, proceeds from the sale are applied to the first mortgage before the second one, and the first mortgage must be paid off in full before any money will go towards the second one.

A second mortgage loan is sometimes called by other names, including home equity loan, home equity line of credit, debt consolidation loan or home improvement loan. People usually take out second mortgages to access capital that's tied up in the home equity they've built as they've paid down their first mortgage.

How to Get a Second Mortgage

To get a second mortgage, lenders will want you to have a significant amount of home equity already built up, as well as a low debt-to-income ratio, secure employment and a good credit score.

If you have bad credit, all is not lost. There are lenders out there who will offer you a bad credit second mortgage, though you should be aware that the terms and conditions will not be as advantageous as they would be if you had a high credit score. You've got to be careful with a bad credit second mortgage, too, because if you're already struggling with debt, you might sink yourself.

Things You Should Know Before You Apply

On a home equity loan, interest rates are usually higher because these loans are subordinate to your first mortgage. Thus, the lender faces a higher degree of inherent risk, which must be offset by the collection of higher interest.

Your second mortgage rate will usually be fixed, as well. Few lenders offer variable rate second mortgages. If you've got credit problems, you should try your best to correct them to the greatest possible degree before applying for a second mortgage. This will help you get the best possible terms.

Finally, you should be aware that your second mortgage could trigger a foreclosure on your house if you default on your payments. Even though the second mortgage is subordinate to the first, your second mortgage lender can put a lien on your house if you fail to make your payments, thus starting the foreclosure process regardless of whether or not you are in good standing on your primary mortgage.

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