How Do Second Mortgage Loans Work?


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The way a second mortgage works is similar to a home equity loan, which is a fixed rate, simple interest loan, recorded as a second lien on the property title deed. A second mortgage can provide access to home equity without refinancing.

Cash out from second mortgages can be used for just about any purpose, such as home improvement, or debt consolidation. Paying off high interest debt, reduce monthly payments, change compound interest into simple interest, and save money from a possible tax deduction. 

When you compare 2nd mortgage rates, terms are usually offered in 5 year increments, ranging from 5 to 20 years. Fully amortized, fixed rate second mortgages are scheduled to be paid off at the end of the designated term as specified in the loan documents, with no balloon payment due. 

Second mortgage rates can be influenced by a number of factors such as: credit scores, the amount of the loan, debt to income ratio, your disposable income, and the value of your home.

2nd mortgage interest payments may be tax deductible for a primary residence, with a limitation for the deduction set at a maximum of $100,000 or 100% of value. Check with a tax advisor.

The entire second mortgage loan, minus any closing costs, is paid in one lump sum at the close of the loan process, unless there is an agreement to pay any third parties directly. For example, a lender may require some borrowers to pay off certain debts in order to meet the debt to income ratio. Also, if you have a line of credit or home equity loan, it must be paid off with the new loan.