How does a second mortgage work?


Quick Answer

A second mortgage, sometimes referred to as a home equity loan or line of credit, provides a cash payment to the homeowner after he establishes his home as collateral for the loan, Zillow notes. The value of the cash received is the difference of the mortgage balance already remaining on the home and the market value of the property, AARP notes.

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Full Answer

If the home owner defaults on his loan payments, the original mortgage is paid off by the sale of the property before any money is applied to the second mortgage, Zillow explains. Most second mortgage loans come with a fixed interest rate agreed upon by the home owner and the lender, The Federal Trade Commission explains. The amount the homeowner can borrow is generally limited to 85 percent of the equity in the home. The actual amount depends on the home owner's credit history, income and the market value of the home.

When a homeowner is looking for a second mortgage, he should note the fees attached the loan, the Federal Trade Commission advises. This includes the application or loan processing fee, underwriting fee, funding fee, appraisal fees and recording fees. Homeowners pay more to finance when these fees are added to the loan amount.

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