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What is a second mortgage?

If you have enough equity in your home, you can draw from that equity to pay for anything you like. Getty Images/iStockphoto

A home is one of the biggest investments you can make. It provides numerous benefits, from increasing your net worth to providing financial security. But one benefit homeowners may overlook is the ability to use their home as a source of funding for large expenses.

If you have enough equity in your home, you can draw from that equity to pay for anything you like — often at a rate much lower than other financing options. One way to do this is with a second mortgage. In this article, we'll explore what a second mortgage is, how it works and how you can benefit from one.

Learn more about your options by checking out current loan rates here.

What is a second mortgage?

A second mortgage (also known as a home equity loan) is a loan that's secured by your home, just like your primary mortgage is. However, instead of borrowing the full amount to purchase the house, you're taking out a separate loan on the equity you've accumulated.

This loan is called a second mortgage because it's in the second position behind your primary mortgage. In other words, in the event you default on your loan, your original mortgage will be paid first.

Find out how much you could borrow from your home's equity by comparing current rates online now.

How a second mortgage works

A second mortgage gives you a lump sum of cash. You repay the loan over a set period at a fixed interest rate. You can typically borrow up to 80% of your home's current market value minus the balance remaining on your primary mortgage. 

For example, say your original mortgage was $300,000. You've paid off $50,000 to date, bringing the balance down to $250,000. If your home is now appraised at $400,000, that means you have $150,000 in home equity ($400,000 minus $250,000). If a lender lets you borrow 80% of your equity, you'd be able to borrow $120,000.

You can use a second mortgage for anything you wish, such as to make home improvements or consolidate debt.

Benefits of second mortgages

A second mortgage can be a smart choice for many reasons. Here are three of the big ones.

  • Lower interest rates: Interest rates on second mortgages are often significantly lower than other financing methods, such as credit cards and personal loans, because your home serves as collateral. However, that means if you default on a second mortgage, you could lose your home. So only borrow what you're confident you can repay.
  • Fixed interest rate and payments: Financing options like credit cards and home equity lines of credit (HELOCs) have variable interest rates. That means your monthly payments could go up at any time, costing you more and making it harder to budget. Most second mortgages offer fixed interest rates, making repayment easier and more predictable.
  • Potential tax deductions: If you use the funds from your second mortgage to make IRS-approved home improvements, you could be able to deduct the interest you pay come tax time. "Interest on home equity loans and lines of credit are deductible only if the borrowed funds are used to buy, build, or substantially improve the taxpayer's home that secures the loan," the IRS explains. "The loan must be secured by the taxpayer's main home or second home (qualified residence), and meet other requirements."

The bottom line

A second mortgage can offer homeowners a cost-effective way to access needed funds. By tapping into the equity they've built up in their homes, homeowners can finance expenses more affordably than with other financing methods. To begin exploring your second mortgage options start by viewing today's rates here

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