About Second Mortgages - Second Mortgages

Second mortgages are a secured loan that is subordinate to a prior loan on the same property. A property can have many loans or "liens" against it. Second mortgages are subordinate to a first mortgage because the first mortgage is paid off first before the second mortgages when a loan is defaulted. A second mortgage is often used for credit card payments, college plans, and for home renovations. The amount of a second mortgage is determined by the equity of your house. Equity is determined by the difference between the total amount of loans on the house and the value of the house.

There are two primary kinds of second mortgages:

Home equity line of credit. These kind of second mortgages have a fixed interest rate for a specific term that is adjusted for the remainder of the loan. The adjustment is determined by changes in a pre-selected index and is enforced on a specific schedule, which is usually one year. The interest rate and monthly payment changes depending on fluctuations in the index. Some common indices used for mortgages include: Treasury Bills (T-Bills), Cost of Funds Index (COFI), Certificate of Deposit (CD), and London Inter-Bank Offered Rate (LIBOR).

Fixed rate mortgages. Fixed rate second mortgages have a fixed interest rate and a fixed loan term. Some of the common types of fixed rate mortgages include: 30-year fixed rate mortgages, 15-year fixed rate mortgages, biweekly mortgages, and ìconvertibleî mortgages. 30-year fixed rate mortgages have the lowest monthly payments and have a fixed monthly payment schedule. On the other hand, the 15-year fixed rate mortgage allows you to own a house in half the time and at a lesser accumulated interest than a 30-year fixed rate mortgage. The term of 15-year fixed rate mortgages is also decreased by 10 percent to 15 percent higher monthly payments. Many homebuyers prefer 15-year fixed rate mortgages because they are able to own a house in a shorter period of time. This enables them to own a house before they reach the age of retirement or before their children go to college.

Bi-weekly mortgages decreases the term of the loan to 18 or 19 years by enforcing a payment of half the monthly amount every two weeks. Bi-weekly payments also add to the annual amount of payment by around 8 percent and allow you to make 13 monthly payments or 26 biweekly payments each year. The decreased loan term of bi-weekly mortgages significantly lessens the accumulated interest of the loan. Your eligibility for this type of second mortgages depends on a 30-year term and many lenders who offer biweekly mortgages also allow you to change to a 30-year term without loss to the borrower.

Aside from the two primary kinds of second mortgages, other types have also emerged in the past years. These include the Adjustable Rate Mortgage (ARM) and creative financing mortgages.

Adjustable rate second mortgagess. Adjustable rate mortgages (ARM) emerged during a period where high interest rates discouraged many people from the housing market. ARMs have lower starting rates because the borrower and the lender share the potential risk of higher interest rates. ARMs have four main elements:

• Initial interest rate second mortgages. The initial interest rate of ARMs are usually 1-3 percent lower than the normal fixed rate mortgages.
• Adjustment interval. Adjustments are made during changes in the interest rate and monthly payments.
• Index. Lenders use a specific index to determine the difference between their income on their investment in the mortgage and their potential income on other kinds of investments.
• Margin. This is the extra amount that the lender adds to the index to fix the adjusted interest rate of an ARM. Margins normally range from 1.5 to 2.5 percent.

Aside from these four main elements, ARMs usually have specific consumer safeguards like interest rate caps which prevent the interest rate from increasing beyond the borrower's financial capability. Other ARMs have monthly payment caps that limit the level of increase of payments during adjustment periods.

Creative financing second mortgages. Creative financing mortgages, also known as seller-assisted mortgages, allow the seller of a house to underwrite all or a percentage of the loan. This type of second mortgage usually has a lower interest rate and monthly payment. However, the main drawback of this mortgage occurs when the past homeowner holds the deed of trust. If the terms of the loan require specific schedules of payment, the buyer of the property may be forced to find other methods of financing. A lot of homebuyers have encountered problems with this type of second mortgage and have found it to be viable only as a short-term alternative to traditional mortgage policies.