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2nd Mortgages: Tap into Your Home Equity

Joy Breiling
LoanBiz Columnist

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If you are like most Americans, your home is your largest asset, and your monthly mortgage payments are most likely your largest expense as well. With so much of your financial picture wrapped up in one asset, it is important to understand how your home can assist you in reaching your overall financial goals. A 2nd mortgage is one avenue you may want to explore in using your home to help grow your financial future.

What Is a 2nd Mortgage?

When you purchase your home, you used your down payment and a first mortgage to finance your purchase. You may have even gotten a 2nd mortgage at that time. A 2nd mortgage is a Deed of Trust that is placed behind, or in a subordinate position, to a new or existing first mortgage loan. The subordinate position means that the lien for the 2nd mortgage would be paid after the existing first mortgage in the case of foreclosure and/or the sale of the home. As this is of greater risk to the 2nd mortgage lender, there are different programs, interest rates, and criteria as compared to the traditional first mortgage loan. Two main types of 2nd mortgage loan programs are the Home Equity Line of Credit (HELOC) and the Home Equity Loan (HELOAN).

Home Equity Line of Credit vs. Home Equity Loan

A Home Equity Line of Credit can best be compared to a credit card. You are given a line of credit by the lender through which you can make withdrawals and repay funds over a "draw" term (generally 5-10 years). You can disperse the funds as needed and if you pay back the funds borrowed, you are able to re-disperse the funds as long as you are still within the "draw" period. However, the interest rates you would pay on a home equity line are variable, as they are based on the current Prime Rate.

In contrast, the Home Equity Loan is dispersed as a lump sum at the beginning of your loan term and has monthly payments amortized over the term of the loan. Once you pay down or pay off the home equity loan, the only way to get access to the funds again is to refinance into a new 2nd mortgage. However, the home equity loan is a fixed rate 2nd mortgage and not subject to the volatility of current interest rates.

2nd Mortgage Usage

A second mortgage can be used for a variety of purposes, including debt consolidation, home improvement projects, funding an education, or large ticket purchases such as cars.  Since the interest rates charged on a 2nd mortgage can be substantially lower than other traditional forms of credit, homeowners can save money and increase monthly cash flow by utilizing a 2nd mortgage as an alternative to more expensive forms of borrowing.

As with all loan programs, take the time to do your research and contact a trusted lender. 


About the Author
Joy Breiling has been employed with the mortgage industry since early 1997. During her career, Joy has fulfilled many positions; including Operations Manager of a large Bay Area broker office. She is currently licensed with the California Department of Real Estate and is an active mortgage originator.

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