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Second Mortgage Loans

Two houses made of wooden blocks
Second mortgage loans refer to any loan that places a secondary lien on a borrower’s property. This type of financing acts in the same way a traditional home loan operates: a borrower can obtain them with either fixed or adjustable rates and they can pay them back over extended periods of time. This type of financing is perfect for borrowers who need a large of sum of money in the immediate future.

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Second mortgages are wonderful tools to the financially prudent who are looking to avoid mortgage insurance costs. Mortgage insurance is required on home loans that are over 80 percent of a property’s value. As a result, a second mortgage allows a homeowner to have two separate loans for the property—none of which total more than 80 percent of the property’s total value.

Much like a home equity line of credit (HELOC), second mortgages serve as a bet against one’s equity in their property. Borrowers who expect their equity to grow should find themselves in a relatively safe spot to take out a second mortgage loan. Those who foresee a decline in their property’s value—and consequently their home’s equity—should be wary about taking out a second home loan.

The difference between this kind of financing and a HELOC is that a the former grants a borrower a large sum of money all at once, whereas the latter provides a line of credit that the borrower is able to pull from as time progresses. That is why a second mortgage is usually superior when a borrower hopes to make a large purchase or upgrade in the near future.

Second mortgage loans, often called junior loans to distinguish them from original mortgages, may provide homeowners with relatively low-cost borrowing opportunities—but the use of the home for the loan's collateral may persuade some borrowers to seek funds elsewhere.