Eli5 What is a second mortgage on a home? And why would anyone do that?

Someone owns a house that has a value of $200,000 but they only owe $100,000 on their mortgage loan. Now they need $50,000 dollars and use that equity (the value of their property above what they owe) as collateral (something the bank can take to repay the loan). They now have a second mortgage.

There’s a few reasons why to do this as appose to refinance.

-Term of loan (15-30 year) on refinance

-Rates may be higher to refinance

-Some mortgages can not be refinanced

-House gets reappraised

• PMI (private mortgage insurance)

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Two forms of ‘second mortgage’:

Home equity v line of credit

Line of credit is spend as you need (like a credit card), with variable rates… and HE is all money at once, with a flat rate.

Both work on the same principal of Home Equity. – what you paid off on principal of loan is your money or percentage of home owned. And also does not add to your CURRENT loan term. Although the second mortgage has it’s own term, usually much lower and payments are not the same as first mortgage payment.

As the example above, a home bought for 200k and paid off 100k has 100k in equity.

But borrowing against that you need something to promise (collateral) the bank they can have if you can’t pay second mortgage. Hence the 50k number… although some will let you do up to 80% of equity.. and rates reflect that percentage.

If you need money fast and without complications this is a very fiscally responsible thing to do.

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When I was looking into second mortgage vs refinance vs private loan I had to weigh options and amount of money needed. In my situation I went with private loan. My signature was good enough to carry fair terms and a short life with the money that i needed. Second mortgage was a maybe, with way less money paid out, and refinance was not a viable option in every aspect of it.

Soooo… everyone’s situation is different and there financial needs and options are widely different.

Hope I explained clearly?

It’s basically selling part, or all, of your home(that you own and have paid off) back to the bank in exchange for cash. You will usually refinance for a longer period, or have a second mortgage for a different amount of time. Refinances tend to be more of a reset on your loan in the amount you owe. Lets say you’ve lived there for 15 years, and have paid $100k now you owe 100k left. if you refinance you now have 30 more years to pay, but your payments basically cut in half. This is mostly beneficial if a partner loses a job or something, and budget gets insanely tight.

These are very bad ideas in the long term, as you will always pay a ton more than you borrowed. That being said, many americans have had to do this for whatever reason, and because it’s common, and finance problems are common, sitcoms introduce this to relate to the audience.

With a 2nd mortgage you are borrowing against money you’ve invested in your home.

It is a bad idea almost all the time. People do it to add a swimming pool or something like that, but it is expensive debt.

This thread is freaking me out. The number of entirely accurate posts is shockingly low. And the amount of misinformation is staggering.

Any loan a financial institution provides is priced for risk. No collateral? That’s an unsecured loan and the riskiest loan you can get. Therefore, the amount will be more limited and the rates and repayment terms will be pretty poor. Add bad credit and you aren’t likely to get much if anything, and it’s going to be paid back quickly at a high rate. Mortgages are on the other end of the spectrum. Well qualified borrowers can get a 15 year loan at 2.5%.

So minimizing your borrowing costs can certainly be a good thing (paying off a 19% credit card with a 4% HELOC). But they can also allow people with bad habits to dig themselves a hole. Paying off a CC with a much lower rate makes sense, but if the borrower doesn’t correct their behavior they are just going to max their CCs again and again until they run out of equity or max out their DTI (debt to income ratio). Which is why it shows up in TV.

Also, the loan takes 2 weeks minimum, and that’s just for the legal waiting times, so that borrowers cant be leveraged out of their homes.