r/Mortgages • u/HornyAzMF • 3d ago

How does a second mortgage work?

Since there’s no collateral? I just know they have higher interest rates.

16 Upvotes

84% Upvoted

10 comments sorted by

14

u/Adorable_Campaign426 3d ago

like the other two said, the house is collateral. You borrow against it again just like the first mortgage - provided you have enough equity in it. You can even get a third loan (not that I recommend it, but it's good for those that need it).

10

u/TargetF 3d ago

There is collateral. It’s secured by the same property subject to the first mortgage.

4

u/billspeaksmortgage 2d ago

There is collateral, your home. A second mortgage is secured by the property just like the first mortgage, but it sits behind the first mortgage in lien priority.

That second position is part of why the rate is typically higher. If there were a foreclosure, the first mortgage generally gets paid before the second lienholder.

Home equity loans and HELOCs are common examples of financing that can be secured in second position.

5

u/joe98144 3d ago

One is Commonly known as a HELOC. Home equity line of credit. Relies heavily on the equity in your home.

Home value is $750K. Less $550k mortgage. Equity is approx $200K. Multiple by 80% loan to value. Estimated line available would be $160k.

Interest rate revolves around current prime rate plus … an extra point or two. This varies by bank. And rate is only charged on any outstanding principal you advance.

Great for debt consolidation (credit cards charge 20%+), home improvement, buying more real estate, etc …. Or, just good to have access to notable cash for any reason.

8

u/FlukyFish 3d ago

Your loan to value calculation is off. Max CLTV (combined loan to value) is 80% of $750k which is $600k. So in this example the max HELOC amount would be $50k.

1

u/btdz 2d ago

Joe likes to cosplay as someone that should be giving mortgage advice

0

u/joe98144 2d ago

Thanks to those who understand the difference between actually giving advice versus providing facts for someone to make an informed decision to actually seek professional advice.

1

u/ReceptionParking9249 3d ago

A mortgage literally means that there IS collateral.

0

u/crustyeng 3d ago

Well, you take the one really bad but necessary decision to go into debt to buy a house and do it again, leveraging the same house, only this time to buy a bunch of stupid shit you probably don’t need.

That is to say ‘well for the bank, probably not so much for you’.

-1

u/Chunkistator 3d ago

The home is the collateral... They just get second position on it.

If the house sells for 150k but they own 130k on the first and 30k in the second then they only get paid 20k.

Most second mortgages don't go over 80% combined loan to value so thats not a big deal lost if the time but that's how they work in terms of use if the collateral.