A second mortgage is an additional mortgage on a property that has already
been mortgaged once. Its settlement is secondary to the main
lien. There are several home loan variations that are sometimes
referred to as second (or "2nd") mortgages. Here are three of the
most common second mortgage types:
A home equity loan is a loan where the borrower's home is used as
collateral, usually secondary to the first mortgage. Home equity
loans generally pay the borrower a lump sum amount; they often have
fixed interest rates and fixed repayment amounts. Homeowners,
particularly the elderly and those with low incomes or poor credit,
should be careful when borrowing money based on their home equity.
If you fail to make your home equity loan payments, perhaps because
your income is insufficient to keep up with the monthly payments,
you may lose your home.
A home equity line of credit is money in a loan account that can
be used as you need it. You can use any portion of it at any time
and pay it back at any time. The interest rate is usually variable
and may be tied to the prime rate. As with home equity loans, your
home is at risk, and it is important to make loan payments on time.
A reverse mortgage is a financial instrument in which a home mortgage
is transferred to a bank, from which the homeowner receives an annual
or monthly income (or a lump sum amount). Many older Americans
are turning to reverse mortgages to pay for medical treatment, finance
home improvements, buy long term care insurance, or supplement their
incomes. Note that a reverse mortgage can be structured as either
a secondary lien or a primary lien.
Loan or Line of Credit?
If you need to consolidate high interest rate credit card balances or
other loans, finance a college education, make home improvements, or
cover unexpected expenses, a second mortgage loan or perhaps a line of
credit may work for you. The table below contrasts the key features
of 2nd mortgages and home equity credit lines.
Line of Credit
Lump sum amount.
Interest rate is fixed for the life of the loan.
Fixed monthly payment includes principal and interest.
Choose payback period from flexible maturity terms.
Borrow as needed; pay interest on the outstanding balance only.
Interest rate is variable.
Flexible payment terms. Pay off the line at any time with no prepayment charges.
Access the credit line by writing checks up to your credit limit during the access period.
Persons who have current borrowing needs but do not foresee future ones.
Persons who have a current need and would like to have a flexible line of credit for future uses.
Related Home Finance Websites
This FTC real estate guide features an introduction and answers
to frequently asked questions about home loans and mortgages.