What is Second Mortgages?
A second mortgage is simply a new mortgage placed against a property where there is already a first mortgage loan in place. It would not replace the first mortgage but is added onto the property title as a second charge.
First mortgage lenders have priority over the second mortgage lender. If the property is sold or goes into default the first mortgage holder is paid.
If the second mortgage were to go in to default, the second mortgage lender would essentially have to pay off the first mortgage loan to gain access to their collateral.
Lenders, therefore, consider seconds to be riskier loans.
Are There Different Types of Second Mortgages?
There are generally two types of second loans
1. Home Equity Lines of Credit.
A home equity line of credit (HELOC) will be set-up with a maximum limit available for the homeowner to draw against. It usually has an open term and can be drawn upon like a credit card. You can normally access the funds by writing a cheque, making a cash withdrawal or completing an online account transfer. This type of account is used in cases where homeowners may need access to funds but they pay no interest on the funds till they withdraw them.
Most HELOCS are based on the banks prime rate and can be interest only payments. Interest payments are made monthly on the outstanding balance for that month. There is considerable competition among banks and lenders for these HELOC mortgages.
2. Home Equity Loan
A more traditional second mortgage loan is the home equity loan. Home equity loans are fixed-rate loans with set payments each month. The interest rate is usually higher than that of a first mortgage but may be less than that of a HELOC. The benefit of the home equity loan is that it amortizes to a zero balance over the term of the loan. This type of loan is more common for people who need access to large amounts of funds at one time for such things as home renovations, large consumer purchases and college tuitions.
Your choice between these types of mortgages will depend on your individual needs, your budget along with the terms conditions imposed by individual banks or lenders.
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