What is a Second Mortgage? Understanding Your Options

A second mortgage, as the term suggests, is an additional loan taken on a property that’s already mortgaged. It’s an easy way to access a significant amount of cash, and many Utah homeowners use the funds to consolidate debts, pay for emergency repairs, make property renovations or finance large financial needs.

With a second mortgage, the equity in your home – which is the current market value, minus what you owe on your first mortgage — is used as collateral. Lenders may allow you to borrow against this asset through either a home equity loan or a home equity line of credit. Here, we compare the two options. 

what is second mortgage

Home Equity Loan

With a home equity loan, the cash comes as a one-time, lump-sum payment. The funds are repaid over a fixed term at a fixed interest rate – the monthly amount due never changes. This makes it easy to factor the additional mortgage payment into your budget.

The drawback? If you tap all the equity in your home and the property values in your part of northern Utah decline, you may lose money if you decide to sell – or, worse, you might not be in a financial position to even consider moving.

Home Equity Line of Credit

Known as a HELOC, this type of second mortgage is similar to a credit card. You have access to a certain amount of money for a set time period, and you can draw on the line of credit as needed. As you pay off the balance, the credit revolves and you can borrow the funds again. 

The shortcoming of a HELOC? The interest rate is usually variable, so the monthly payments due are not set in stone – they may rise and fall as the prime rate moves up and down. 

Which Type of Second Mortgage is Right for You?

Before you make a decision, think about how much money you need and how you plan to use the funds.

A home equity loan could be a smart choice if you need a specific amount of cash now – such as for a wedding or a new roof — and don’t have plans to borrow any more in the future. If, on the other hand, you have a long-term need for extra cash, a HELOC may be ideal.

Regardless of which type of second mortgage you choose, remember that borrowing against your home can be risky. If you cannot make the required payments, your house may go into foreclosure. Also, be aware that if your home value decreases, you could end up owing the bank more than the property is actually worth.

Have questions? For expert help through every step of the second mortgage process, call on the professionals at Intercap Lending. Our knowledgeable team can explain the options for Utah homeowners and find a solution that best meets your needs.Intercap Lending, headquartered in Orem, Utah, is a trusted leader in the mortgage industry. To schedule a free consultation to discuss second mortgages and shop for a home equity loan or home equity line of credit, contact us today.