Second Mortgages

Second Mortgages

A second mortgage may also be referred to as a second loan, a home equity loan, or even a "piggyback" mortgage or loan. A second mortgage is an additional mortgage that a homeowner takes out on their home, above and beyond their first or primary mortgage. Second mortgages may typically be taken out up to 85% of the appraised value of the home (meaning that the total loan-to-value of the primary and second mortgage add up to 85% of a home's market value).

A second mortgage gets its name from the fact that it is a subordinate mortgage to the primary mortgage and is in a second lien position behind the primary mortgage. A second lien position means that in the event of a foreclosure, the proceeds of the sale of the home would pay off the primary mortgage first, and the second mortgage second. It is also possible for a home to have third, and fourth mortgages, the number referring to the loan's relative lien position.

Second Mortgage Rates

Similar to primary mortgages, the interest rate for a second mortgage can either be fixed or adjustable. For a fixed-rate second, the interest rate and monthly payment will remain constant throughout the term of the loan. For an adjustable-rate second mortgage, the interest rate and the monthly payment will fluctuate over the term of the loan.

Second Mortgage Term

Second mortgage repayment terms are typically not as long as a primary mortgage (which is typically 30 years). Some second mortgage loans may, however, take 15 to 20 years to repay.

Second Mortgage Fees

Similar to other types of loans, lenders may charge borrowers fees to obtain a secondary mortgage. Shopping various lenders should help to keep the fees reasonable.

Uses for a Second Mortgage

The most common uses for a second mortgage are:

  • Obtain equity from the home - A second mortgage is one means of obtaining cash from the equity in a home. The other means being cash-out refinances or a home equity line of credit (HELOC). A second mortgage may be a better alternative to refinancing when the money obtained from the mortgage is for something more short term than the "normal" 30-year term of a primary mortgage (such as the purchase of an automobile which most people would look to pay off in four or five years). A fixed-rate second mortgage may be preferable to a home equity line of credit when the borrower needs all of the money at once.
  • Avoid paying PMI - A second mortgage that is piggybacked on the primary mortgage may be used as a way of avoiding private mortgage insurance (PMI). In this instance, a borrower would take out a first mortgage for 80% of the value of the home avoiding PMI, and a second mortgage for the amount not covered by the first mortgage and the borrower's down payment. You may see these referred to as 80/5/15, 80/10/10, or 80/20 loans (The first number refers to the percentage of the purchase price covered by the the primary mortgage, second number the amount covered by the down payment, and the third number is the amount covered by the second mortgage. Obviously an 80/20 is 80% first mortgage and 20% second mortgage with no down payment.
  • Avoid taking out a jumbo loan - A second mortgage can be used as a means of taking out a jumbo loan which typically has a higher interest rate than a conforming loan. In this case, mortgage number one would be for an amount equal to the Fannie Mae, Freddie Mac allowed maximum, and mortgage two less the borrower's down payment would cover the remaining purchase price of the home.

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