Law of Second Mortgages
When homeowners build equity in their homes, they may decide to take out a second mortgage to access that equity. A variety of laws govern how the second mortgage functions, particularly in relation to the first mortgage and tax payments.
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First Mortgage
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A second mortgage is subordinate to a first mortgage when it comes to repayment. Borrowers need to make payments on both mortgages, but when a homeowner sells a home, the first mortgage is paid first. Additionally, when a home is foreclosed upon, the first mortgage gets priority in any assets that come from the home. As a result, second mortgages often carry higher interest rates than first mortgages.
Taxes
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Second mortgages are popular because, like home equity loans, the interest is usually deductible, like first mortgage interest, on federal income tax forms. Home equity lines are generally variable-interest-rate lines of credit; second mortgages are more traditional fixed-rate and fixed-term loans.
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Warning
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Sometimes homeowners are able to access 100 percent of the equity in their home with a second mortgage. However, if home values fall, they may not be able to sell their home for as much as they owe. Because they must pay off the second mortgage, they may be forced to go into debt to sell. Additionally, a homeowner must pay off a second mortgage in order to refinance.
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References
- Photo Credit New Home image by Ryan LeBaron from Fotolia.com
