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What is a Second Mortgage?

Second mortgage loans are useful financial tools for homeowners.  Second mortgages, also called home equity loans are liens that are taken out in addition to an existing 1st mortgage that are held on title in 2nd position.  Traditionally, 2nd mortgages where taken out for cash out, like refinancing, and the lender holds the borrower’s home equity as collateral for the second mortgage loan.   A few years ago many aggressive mortgage lenders began using second mortgages as tools for 100% home financing rather than the traditional purpose of consolidating debt or taking out cash. 

  • Cash for Home Modifications like room additions and pool construction
  • Refinance Debt with the funds from a 2nd mortgage

In a purchase transaction, 2nd mortgages or home equity lines of credit are often used because they enable the borrower to avoid paying mortgage insurance that is required on conforming mortgages that have less than 20% of a down-payment. Because the 2nd mortgage is a subordinate lien on title they have a higher default rate and that is the primary reason that second mortgage rates are higher than first mortgage rates.

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