A Second Mortgage is a subordinate, or secondary, mortgage loan that is made while the original mortgage loan is still in effect. Second mortgages are different from Refinances because the borrower is required to pay both the first mortgage and the second mortgage at the same time (wherein refinances pay off your original mortgage and change the terms of the loan). In an original mortgage loan, the property being financed is used as collateral. In a second mortgage, there is no property to use as collateral. If the property were to be foreclosed upon, the proceeds from the sale would go to the original mortgage first, and the second mortgage would take any of the remaining proceeds. This increased risk often results in a higher interest rate than the original mortgage. Second mortgages are typically paid out to the borrower as a lump-sum payment at the beginning of the loan.
HELOCs (Home Equity Lines of Credit) and Home Equity Loans are the two most common types of second mortgages. When you assess your home’s equity, you take the current principal balance and subtract that from the market value of the property. In both instances, you are borrowing against your home’s equity. In a Home Equity Loan, you receive a lump sum at the beginning of the term. In the instance of a HELOC a lender determines a balance that you can borrow against the equity of your home as a line of credit. And once the borrower pays that money back the” credit limit” goes back to the original agreed upon amount.