What is a second mortgage?
A second mortgage is a loan that is secured by home itself, and subordinate to first mortgage. Any mortgage taken out against a home in addition to an already established mortgage automatically becomes a second mortgage.
As name implies, second mortgages are secondary to first mortgages. This means if homeowner is forced into foreclosure, second mortgage holder will receive no proceeds from sale of home until first mortgage has been completely repaid.
Characteristics of a typical second mortgage: Since lender's risk is higher, second mortgage loans carry a higher interest rate than first mortgage loans. Second mortgages are typically shorter in duration (usually 15 years or less). A second mortgage may require a "balloon" payment at end of repayment period. This one is a biggie: interest paid on a second mortgage is tax deductible in most circumstances!
Primary types of second mortgages:
Home equity loan - This is traditional type of second mortgage. There is a one-time disbursement of loan funds (in a single check) followed by a period of regular monthly payments and a fixed interest rate.
Home equity loans are often used to consolidate debts, remodel home, fund a college education, purchase a big ticket item such as an RV, or most anything that requires a large amount of cash. Line of credit - This type of second mortgage is very different from a home equity loan. With a line of credit, you don't receive a large check for full amount up front. You may never even borrow any actual money from it at all!
The interest and payment on a line of credit second mortgage can and does change periodically. The interest is typically tied to prime rate. The actual interest rate will be prime rate + a certain number of percentage points.