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What are 2nd Mortgage Loans?

By Bethany Keene
Updated: May 17, 2024
Views: 2,955
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2nd mortgage loans refer to loans that are taken out with equity in a home used as collateral, in addition to a first mortgage that is already on the home. A second mortgage is considered slightly more of a risk than a first mortgage, because if the house is foreclosed upon, the first mortgage will always be paid first. 2nd mortgage loans are often referred to interchangeably with home equity loans because they place a lien against the home, and use it as collateral, rather than a personal loan that is unsecured. The terms should not be confused with a home equity line of credit, however, which is more similar to a charge card opened against the home than an actual loan taken out.

There are many reasons a homeowner might take out 2nd mortgage loans on his or her home. Some people use them to make repairs or improvements to the home, such as putting on a new roof or remodeling a bathroom. Other people will use 2nd mortgage loans to pay off other debts, such as credit card debt that includes very high interest rates. This is not recommended, however, because if the homeowner cannot make the payments on the second mortgage, he or she might end up facing foreclosure because the debt is secured by the home; credit cards are unsecured debt.

The terms of 2nd mortgage loans can vary, just like the terms in a first mortgage. They can be as short as one year in length, which is fairly rare, or as much as thirty years. Interest rates on second mortgages tend to be slightly higher than first mortgages due to the reason mentioned above, that they are considered slightly riskier. As compared to most other types of loans, however, particularly personal loans, second mortgages have very low interest rates.

It is important to consider the additional costs associated with 2nd mortgage loans as well. This can include application fees, closing costs, or any additional fees to appraise the existing value and equity in the home. In addition, be certain of the structure and terms of the loan before signing any paperwork; though most loans simply require making monthly payments over a period of years, some loans feature adjustable interest rates, which can drastically alter the payment. A balloon payment at the end might exist in some 2nd mortgage loans as well, so be sure to understand that feature as well.

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