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A Second Mortgage and a Second Opportunity

Posted by  on May 10, 2010
 
Second mortgage loans can be used to consolidate debt, do home improvements or pay for a great college education. Whatever you decide to do with your loan proceeds it is important to remember that if you default on your payment you can lose your home so you will want to make sure that you are taking the loan out for a worthwhile purpose.

Another plus of a second mortgage loan is that the interest you pay back on the loan may be tax deductible. Consult your tax adviser regarding your personal situation but in most cases the interest is 100% fully deductible as long as the combined loan to value of your 1st and 2nd mortgage do not exceed the value of your home.

A second mortgage is a loan that is secured by the equity in your home. When you obtain a second mortgage loan the lender will place a lien on your house. This lien will be recorded in 2nd position after your primary or 1st mortgage lender's lien, hence the term second mortgage. A second mortgage is also sometimes referred to as a home equity loan. There is no difference between a home equity loan and a second mortgage. These are just two different terms for the same subject. A second mortgage can either be a fixed-rate loan or an adjustable-rate credit line. Interest rates and loan program terms will vary from lender to lender so it is important to shop around and compare before committing to any one offer.

The maximum amount available on a second mortgage is the full market value of the collateral security you provide. The second mortgage lender holds the legal title of your property. This legal title is known as equity of redemption. However, equity redemption holds good only as a security for the amount of loan. It does not carry any real ownership powers.

The fee that mortgage brokers require is usually calculated to a certain percentage of the loan amount. If you opt for a fixed rate loan, the interest rate is fixed for the life of the loan. Many mortgage companies offer variable rate mortgages called adjustable rate mortgages (ARM's.) This is done to ensure a steady margin for the lender, whose own cost of funding will usually be related to the index. Consequently, payments made by the borrower may change over time with the changing interest rate (alternatively, the term of the loan may change).

Second mortgage loans offer opportunities for everyone. There are two types of second mortgage loans that you can apply for, the closed-end loan and the open-end loan. The closed-end loan allows results in one lump sum of cash at the time of closing.

Closed-end loans can have a repayment schedule that is amortized up to 15 years with a three- or five-year balloon payment. When the balloon balance is due, you can choose to pay off the balance or refinance the remaining money you owe. Unfortunately, closed-end loans do not allow the borrower to borrow any further than the initial loan.

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