Definition
A second mortgage is a type of secondary financing in which the lender maintains a secondary lien on the property until the loan is repaid.
Analysis
A second mortgage may be used to fulfill loan-to-value limits of a conventional mortgage. It works especially well when the borrower does not have a down payment greater than or equal to 20% of the closing price.
By using a second mortgage, a borrower may be able to qualify for a conventional mortgage, thus eliminating the need for private mortgage insurance. This can reduce monthly costs considerably!
A second mortgage requires a secondary lien on the property. This lien will be subordinate to the primary lien placed by the main mortgage lender.
A second mortgage can be taken on a home already purchased as a source of borrowing for the homeowner. They may apply for a second mortgage to cash out built up equity in the home.
Second mortgages are secured by the equity that they are accessing. Primary mortgages must be repaid first at the time of sale before a second mortgage may be repaid. Otherwise, most second mortgages are for shorter duration and are repaid in a few years, whereas mortgage loans normally last for 15 to 30 years.
