What Does Taking Out Another Mortgage Mean?

Taking out a second mortgage means getting another loan–in addition to your initial mortgage–that uses your house as collateral. Since your property is at stake, the stakes are high if you opt to take out a second mortgage. It is important to take into account the financial implications of the loan, the kinds of merchandise offered and your planned use of the money.


A second mortgage permits you to get into the equity in your house, which is the difference between the balance of your original mortgage and the value of your home. As an example, if your house is worth $250,000 and your mortgage is $200,000, you have $50,000 in home equity. When you take any type of mortgage, the bank files a lien against your home. This is a legal action which permits the bank to finally take ownership of your house if you default on the loan. In the instance of a second mortgage, the lien is filed in”second place,” meaning that the bank holding your new loan is second in line to receive proceeds from the sale of your house when you don’t make your loan payments.


Second mortgages come in two basic types: home equity loans and lines of credit. If you take out a second mortgage in the form of a loan, then you will be given a lump sum of money depending on the equity in your house; you may repay the money in installments over a fixed period of time. If you choose a credit line, your second mortgage will function more like a charge card. You will have a credit limit which could be categorized as you pay down the balance. The sum of money you receive from an equity loan or have access to via a credit line will be dependent on just how much equity is available and the lending standards of the bank. Work with your loan representative to determine how much to apply for.


You can use the money from a second mortgage any way you want –for instance, to make home improvements, pay for tuition, buy a vehicle or fund a holiday. Knowing what you intend to use the proceeds for can help you determine the ideal kind of second mortgage to you. If you would like to create one big purchase, a home equity loan with a fixed sum and a fixed payment may be best. If you would like constant access to the equity to get day-to-day use, a credit line would be a better choice.


Taking out a second mortgage involves an extra monthly payment. Assess your monthly expenditures and obligations before applying for another loan to ensure that you will be able to handle the payment. Also, consider the risk involved with the loan commitment, as your house is online in the event that you don’t repay the second mortgage. The Federal Reserve Board notes that you should also consider the costs of opening and maintaining the loan. These expenses might include house appraisal fees, closing costs and annual fees.


If you know you would like to take equity out of your house, but are not certain if a second mortgage is the ideal option, talk to the bank about refinancing your first mortgage and receiving money back within the trade. This choice enables you to have only one monthly payment, and you might save money because prices on conventional mortgages are often lower than on an equity loan or line. Other options to a second mortgage comprise an unsecured personal loan or a loan secured by a certificate of deposit.

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