Second Mortgage
Definition of "Second mortgage"
A scholar second mortgage definition would go something like: a loan with a second-priority claim against a property in the event that the borrower defaults.
But that’s too stiff, right? Let’s try an easier route to understand second mortgage definition.
A second mortgage is an additional loan that is made after you’ve already done your initial mortgage to buy a house. Say homeowner Gary gets a mortgage to pay off his new home. With each payment he does to the mortgage company, he acquires a little bit of home equity, right? So, 5 years later, he needs money to pay for home renovations or college tuition for his son or unforeseen medical expenses and decides to get that equity and put it as real estate collateral for a new loan. This action of securing a loan through the loan you are still paying for is called the second mortgage.
The risk of the second mortgage to a lender is higher because, although it works the same when the borrower defaults and the lender can put the house in foreclosure to retrieve the money invested, the second mortgage is a debt with a subordinate claim to the first mortgage. All subsequent lien is, in turn, subordinate to the second mortgage, and may be used to reduce the amount of a cash down payment or in refinancing to obtain cash for some purpose. The interest rate on the second mortgage is higher because it usually has a repayment term much shorter than the first mortgage with a fixed amortization schedule.
A great benefit of a second mortgage is definitely the amount you get to borrow since the loan is secured by your home. That’s why home renovations one can do out of their own pockets are actions that always pays off for a homeowner; the more you invest in your home and make it worth more will translate into your pockets when you do a second mortgage, since lenders sometimes can borrow up to 80% of their home value!
But beware: as a general rule, it is not a good idea to take out a second mortgage to pay off a first, because, as we said, second mortgages are priced higher. If you take out a second mortgage to repay the first, the second becomes the first, which is a gift to the lender: you are paying a second mortgage price on a first mortgage. But there is at least one exception to this rule. Borrowers with a high-rate first mortgage with a small balance may find it more advantageous to pay off the first with a second rather than refinance the first. This reflects the higher settlement costs on the first. Some borrowers lower their rate by refinancing a first with a Home Equity Line of Credit (HELOC). In the process, however, they are exposing themselves to the risk of future rate increases. HELOCs are much more exposed than standard Adjustable Rate Mortgages (ARM).
Real Estate Advice:
Generally, insurance companies are not permitted by state laws to offer or invest in second mortgages. Talk to a local real estate agent to find out if it’s the case of your state and directions of the best places to apply for a mortgage.
Popular Insurance Terms
Person who receives an income benefit from an annuity for life or for a specified period. ...
Percentage of first year's premium paid to compensate an insurance agent. This is known as the "First Years" to show how much new business the agent is generating, compared with renewal ...
Provision that funds a tax-qualified plan. Trust funds are the oldest, and still the most common, method of funding pensions. All contributions made by employer and employees are deposited ...
Sum provided by a disability income insurance that pays a multiple of the monthly indemnity to cover the costs associated with a retraining course attended by the insured wage earner when ...
Written evidence given to a policyowner by an insurance company or insurance agency that it has received a premium. ...
Future benefits to be paid to the policyholders and beneficiaries, assigned surpluses, and miscellaneous debts. These primary liabilities take the form of reserves, which must be listed on ...
Methods by which a home office underwriter chooses applicants that an insurer will accept. The underwriter's job is to spread the costs equitably among members of the group to be insured. ...
Protection in the event of accidental discharge, leakage, or overflow of water from plumbing systems, heating, air conditioning, and refrigerating systems, and rain or snow through broken ...
Same as term Office Burglary and Robbery Insurance: coverage for the office of a business, or an individual in a general office building or other structure. Includes burglary of a safe; ...
Have a question or comment?
We're here to help.