How a 2nd Mortgage Works


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A 2nd mortgage works by accessing the equity in your home, without having to refinance your existing first mortgage.Your cash out can be used for any purpose, and debt consolidation is one of the most common uses. It has been estimated that you could save up to 3 times more money with a fixed second mortgage term, compared to paying only the minimum monthly payments for the same balance on revolving credit cards, because of lower mortgage rates, simple interest, and a possible tax deduction.

Revolving credit card accounts typically charge daily compounded interest, which means that essentially you pay interest on the interest that accumulates on a daily basis. A 2nd mortgage can provide simple interest payments amortized on an annual basis, which can reduce the amount of loan interest paid, because you are not being charged for accumulating interest.

After deducting the closing costs, there is a one-time disbursement of the full 2nd mortgage amount. Certain debts may have to be paid directly in order to meet the debt ratio requirement. Also, if there is an existing 2nd mortgage on the property, it must be paid with the new loan.

Second mortgage rates remain fixed for the full term, which is usually available in 5 year increments ranging from 5 to 20 years, fully amortized and paid off at the end of the term.