A secured loan (or mortgage) that is subordinate to another loan against the same property. More specifically, the second loan in sequence.
In real estate, a property can have multiple loans against it. The loan which is registered with county or city registry first is called the first mortgage. The loan registered second is called the second mortgage. A property can have a third or even fourth mortgage, but those are rarer.
Second mortgages are called subordinate because, if the loan goes into default, the first mortgage gets paid off first before the second mortgage gets any money.
Thus, second mortgages are riskier and generally have a higher interest rate.
Length of Second Mortgage
Some second mortgage loans may extend for as long as 15 or 20 years; others may require repayment in 12 months. You will need to discuss the repayment terms with the individual mortgage company and select one that offers terms that best suit your needs.
Second Mortgage Rates
If you have a fixed rate loan, the interest rate is set for the life of the loan. However, many companies offer variable rate mortgages, also known as adjustable rate mortgages or ARMs. These provide for periodic interest-rate adjustments.
If your loan contract allows the mortgage company to adjust or change the interest rate, be sure you understand when the company has the right to change the interest rate, whether there are any limits on how much the interest or payments can change, and how often the company can change the rate. You also should know what basis the company will use to determine a new rate of interest.
Second Mortgage Payment Calculations
Be sure you understand how much your monthly payments will be and what they cover. Your mortgage company should be able to give you this information in advance. With some loans, you will be required to make monthly payments on the principal and interest. With other loans, you may be required to pay interest only on the borrowed amount. With these loans, your monthly payments will not reduce the principal amount of the loan. With such a loan, you will be required to pay back the entire borrowed amount at the end of the loan period. These loans are popularly known as "balloon loans." If your loan has a balloon payment, you should consider how you will arrange to repay the entire amount when it becomes due.
On "home equity lines," the mortgage company does not have to give you the exact amount of the monthly payment, but must explain how it is figured. This is because the borrowed amount will vary and your outstanding balance will change if you use the line of credit. However, if your monthly payment term is 5% of the outstanding balance and your outstanding balance is $10,000, your minimum monthly payments would be $500.
Second Mortgage Costs
Many companies will charge a fee for lending you money. The fee is usually a percentage (%) of the loan and is sometimes referred to as "points." One point is equal to one percent of the amount you borrow. The number of points mortgage companies charge varies, so it may be worthwhile to shop around. If the fee seems too high, you may be able to bargain for or find a lower fee second mortgage.
Be sure to get the amount of the fee in writing before you take the loan. Many states limit the amount of fees a mortgage company may charge on a second mortgage loan. You may want to check with your state's consumer protection office or banking commissioner to determine whether there is a limit in your state.