Home ownership can bring about a lot of positive aspects, including the ability to tap into any equity when you need cash. Here we answer the simple question, what is a second mortgage and why would I need one?
A second mortgage is a lien on a house or property that takes second place or subordinate position to the first mortgage while allowing the homeowner to use the equity in the home as security. (Home value minus amount owed = current equity) Taking out a second mortgage results in two mortgages on the home, as opposed to just one. Because a second mortgage is subordinate to the first, they are generally riskier and have a higher interest rate.
There are two types:
Second mortgage is when the homeowner takes out a lump sum at a fixed rate.
Home Equity Line of Credit, aka as HELOC, allows a homeowner continuous access to funds at a variable rate.
The advantage to the second mortgage is you have a lump sum and the interest rate is fixed as opposed to the variable interest rate on a HELOC.
The advantage of a HELOC is the borrower has ongoing access to additional funds and the ability to withdraw only the amount of funds necessary for a specific project, purchase, or need. In addition, your payment on a HELOC is based on the amount of the balance. As with any loan or borrowing instrument, there will be an overall limit of accessible funds.
According to Eric Dunlap, head of mortgage lending at CDC Federal Credit Union, home improvement is a typical reason for taking out either a second mortgage or a HELOC, but in general, the funds can be used for an array of purposes, including dream vacations and major purchases.
It’s important to point out that if the borrower defaults on the second mortgage, the lender has the right to foreclose on the property. So this should always be considered when thinking about taking out a second mortgage.
A lender can help you figure out which product is best for you and based on your finances, the reason for the 2nd mortgage or HELOC, and your complete financial picture. If you would like more information, contact the mortgage lenders at CDC Federal Credit Union to see if taking out a second mortgage or HELOC is right for you.