How do second mortgages work?



A second mortgage is a type of secured loan taken out against the equity in real estate. Typically a person takes out a second mortgage using her home as collateral.

Function

A second mortgage permits a real estate owner the ability to take advantage of equity in real estate. Equity is the difference between the value of the home and the amount due on the existing mortgage.



Types

There are two common types of second mortgages. There is a traditional second mortgage in which a real estate owner receives a lump sum of money secured by the second mortgage. Another type is a home equity line of credit, secured by a second mortgage. Through a line of credit a person can take obtain money in installments over a period of time.

Features

A second mortgage is subordinate to a first mortgage on real estate. Therefore, if a foreclosure is necessary, the full amount due on the loan secured by the first mortgage is paid of initially before funds are attributed to the second mortgage.

Benefits

The perceived benefits of a second mortgage include the ability to take advantage of the equity in real estate for another purposes. For example, the proceeds from a loan secured by a second mortgage can be used to undertake improvements on a residence.



Warning

Keep in mind that although a second mortgage has benefits, it increased your debt obligation. Plan ahead and be certain you have the income to address the obligation associated with a second mortgage.

Source:

Business Finance: Second Mortgages

"The Complete Idiot's Guide to Success as a Mortgage Broker"; Daniel S. Kahn Marian Edelman Borden; 2006



Business Dictionary: Second Mortgage Loan

More Information:



Mortgage 101: Second Mortgage Resources



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