Second Mortgages

A second mortgage is a second loan on your property. Generally a property may have multiple loans or liens against it. While the first loan against it is called the first mortgage, the second loan is obviously called the second mortgage.

The second mortgage is, however, subordinate to the first mortgage. It means that if you default on the payment of your loan, you will have to first pay off your first mortgage before clearing the second mortgage. The loan term on second mortgage is generally shorter than on the first mortgage, but it may also extend up to 25-30 years depending upon your creditworthiness.

Most people go for second mortgage to avoid foreclosures, which happen when they default of payments of their loans. There may be some other reasons for seeking the second mortgage.

You may have incurred large amount of debt on balances on auto loans, high interest credit card loans and other bills including medical bills, education bill and so on. You may use the equity in your home for debt consolidation. For example, the current market value of your home is £125,000 and your remaining debt on it is £100,000. Your equity in the house is the difference between the current market value of your property and the remaining debt, which in this case is £25,000. You can raise a second mortgage against this equity. You can use the funds to pay off your existing debts. If your existing debts are unsecured, you would be paying a higher rate of interest on them. Given the fact that your second mortgage is a secured loan, you would get it at a lower rate of interest. You can therefore use this money to pay off your unsecured debts and save on the high rate of interest that you were paying on them. You can also invest the money in a new business, expand an existing one, or invest in real estate etc.

How much can you borrow on second mortgage?
As a rule, you get a second mortgage on the existing value of your equity in your home. The higher the equity, the more the money you can raise through second mortgage.

Interest on second mortgage
You can choose between a fixed rate and variable rate of interest. The second mortgage loan providers generally ensure that the borrower has:

• Sufficient equity in the first mortgage
• Low debt-to-income ratio
• Good credit ratings
• Reliable source of income preferable from employment