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What is a 2nd Mortgage?

By on May 10, 2014 in Mortgage

A 2nd mortgage, sometimes referred to as a home equity loan is simply a second lien on a property. Subordinate to a 1st mortgage, 2nd mortgages are a more risky funding vehicle for lenders. For this reason interest rates on these types of loans will typically be higher than that of a first mortgage.

2nd mortgages come in the forms of a lump sum payable over a fixed term or a line of credit similar to a credit card. The fixed term product, referred to as a home equity loan, is typically used for one time needs such as a home improvement, kids college education or as a piggy back loan in case you can only afford a smaller down payment. If you are not looking to take cash out immediately but instead wish to have easy access to equity in your home for emergency reason, a home equity line of credit would work best. Home equity lines of credit give you access to the equity in your home very similar as a bank account by issuing you a credit card and/or checks.

What do Lenders Factor when Deciding on a 2nd Mortgage Application?

  • Available Home Equity: You will need to have equity in the home greater than the amount you are looking to barrow.
  • Debt to Income Ratio: A low debt-to-income ratio will be required to show the lender you have the ability to pay the additional payment.
  • High Credit Score: Maintaining a high credit score will demonstrate to a potential lenders that you are a responsible borrower. With lending standards still tight, maintaining a health credit history is extremely important.
  • Employment History: A solid history of steady employment will be essential when applying for a 2nd mortgage.

An important factor to take into account is whether your loan will be considered a recourse or non-recourse loan.

  • Recourse Loan: With this type of loan a mortgage lender will be able to come after you if you should ever default on the loan. Even after a lender has taken your collateral, a lender will be able to sue you in court for any outstanding balance. This can possibly lead to wage garnishment or being sent to a collection agency.
  • Non-Recourse Loan: A non-recourse loan is a loan that is secured by collateral. In the case of a default, the lender would be limited to only the seizure of that collateral. For this reason the loan-to-value on non-recourse loans is typically lower.

Many state deal differently with mortgages and what is or is not considered a recourse or non-recourse loans. For this reason it is extremely important you speak with a licensed mortgage professional.  Banks and credit unions often have excellent rates on 2nd mortgage. However, you should take a moment to research your options when considering any mortgage product.

About the Author

About the Author: Husband, father, tech junkie and sports enthusiast. I have owned and operated as well as a number of others sites since 2005. .


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