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Second Mortgage

Financial Dictionary -> Mortgages -> Second Mortgage

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A second mortgage simply means that it's the second mortgage on a house. A mortgage is a loan (borrowed money that must be paid back with interest) used to finance a house and law allows multiple loans on one property. This second mortgage is considered a subordinate to the first and doesn't have the same rights as the first, making it more risky for a lender to issue a second mortgage. Borrowers can in theory have as many mortgages as they want, although it is rare to have more than three.

If the borrower of the first mortgage fails payment, or breaks any of the agreements set out in the loan they will be forced in to foreclosure and the home will be sold as collateral, with the revenue being used to cover the loan amount owed. If this "default" process occurs, it's the first mortgage that has the right to get their repayment first, leaving the second mortgage at risk of not receiving their full amount. This is why offering second mortgage loans to borrowers are more risky than issuing the original mortgage.

There are several reasons why somebody may take out a second mortgage, although the most common reason is to utilize the equity in the home to make improvements etc. Equity is the value of the amount paid back in the first mortgage. For example if you've paid back 50% of the first mortgage then in essence you own 50% of the house and would receive this much if the property was sold. Taking out a second mortgage or home equity loan against the equity in the home allows you to theoretically get the equity out of the home.

There are several different loan structures and terms for second mortgages and these vary from lender to lender and package to package. Terms can last up to 15 and 20 years, and others may last only a year if there is substantial equity and the first mortgage terms are nearly up.

If applying for a second mortgage as well as having a perfect credit rating, lenders will look out for a solid employment history and a low debt to income ratio.