What is a second mortgage?

A second mortgage is another loan taken against a property that is already mortgaged. Many people consider using their home equity to finance large financial needs, but mortgage industry jargon has confused the meaning of certain terms – including second mortgage, home equity loan and home equity line of credit (HELOC). A second loan, or mortgage, against your house will either be a home equity loan, which is a lump-sum loan with a fixed term and rate, or a HELOC, which features variable rates and continuing access to funds.

Is a second home mortgage right for you?

A loan to purchase a home is usually the first mortgage lien recorded on a property; subsequent loans depend on the amount of owners’ equity in the home and generally require a new appraisal. Homeowners may use the money from these second mortgages – available as a lump sum home equity loan or as a home equity line of credit – for any purpose. Deciding which loan is right for you depends on the loan's purpose and your personal spending habits.

What is a home equity loan?

A home equity loan is usually a fixed-rate loan distributed in one lump sum, with terms that range from 5 to 30 years. You pay it back in fixed monthly installments. This might be a good loan if you anticipate a large one-time expense such as a wedding, the purchase of a second home, or debt consolidation. A home equity loan will incur additional closing costs to you. The credit bureaus treat this type of loan the same way as a purchase loan. If you miss payments, your score will decrease; however, the amount of the loan balance doesn’t affect scoring.

When to consider a home equity line of credit (HELOC)

If you need extra money intermittently, an adjustable-rate home equity line of credit (HELOC) might be your best choice. Once the lender approves you for a maximum loan amount, you can access the money when you need it. You retrieve the funds with a card, ATM or check. The draw period is usually 10 years with total payment due in 20 years.

Monthly minimum payments are variable and based on the amount of the loan balance. As you pay the money back, the funds are available again on your credit line. This provides you with a renewable source of funding during the 10-year draw period. This is a good option if you anticipate the need to make periodic payments for tuition or remodeling.

Although a home equity line of credit provides ongoing access to funds, which may be tempting for some people, there are some critical things to consider.

  • You have to pledge your home as collateral
  • If you don’t make payments, you property can go through foreclosure
  • Your credit score is on the line if you aren’t diligent with your payments

Home equity loans and credit lines are a good choice for many people. The mortgage interest may be deductible, and these second mortgages allow you to use the equity in your home to pay for major expenses. Contact a loan originator or come into one of our many U.S. Bank locations for more information so they can work to understand your needs and provide options.

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