A stand alone second mortgage is a type of second mortgage funded separately from the purchase or refinance transaction. The stand alone second mortgage holds a secondary lien position to the property's first mortgage loan. In most cases, home owners use stand alone second mortgages to borrow against the available equity accrued in a property. Lenders consider stand alone second mortgages riskier then traditional first mortgages. Therefore, these loans typically have more stringent qualification requirements and carry a higher rate of interest then traditional first mortgages.
Lenders issue stand alone second mortgages based on the equity you have available in your home. Your currently available total equity is the appraised value of your home minus the balance on your home's primary mortgage. Lenders may loan you all or a portion of this available equity through a stand alone second mortgage. Some lenders also offer programs that allow you to exceed the currently available equity in your home.
You can get a stand alone second mortgage for a variety of purposes. Reasons you might want to consider a stand alone second mortgage include home renovation, debt consolidation, to make a large purchase, to pay for a child's education or to invest the proceeds from the loan. However, you should always carefully consider the cost of the borrowed money. Stand alone second mortgages typically carry a high rate of interest and have long terms. Also, if you can not afford to pay the new monthly payment on the stand alone mortgage loan, you can lose your house.
The lender of the stand alone second mortgage passes the risk of this type of loan to the borrower in the form of higher interest rates. If the home goes into foreclosure, the primary lender always receives full payment on the first mortgage before the second mortgage lender can recover any funds. In many cases, after legal costs, the second lender may not receive full or even partial repayment of the second mortgage through the foreclosure process. In the event of default, the second mortgage lender often suffers substantial losses on the second mortgage loan.
Pros and Cons
Despite carrying a higher rate of interest than most first mortgages, second mortgages typically still offer lower rates than credit cards and other types of unsecured debt. Therefore, you might save money by consolidating other types of debt into a stand alone second mortgage. Additionally, in many cases the interest payments made on a second mortgage are also tax deductible. A second mortgage can, however, result in negative equity on your house in a declining real estate market. In cases of negative equity the balance owed on your mortgage loans will exceed the appraised value of your house. This can make it impossible to sell or refinance your house.
- IRS.gov: Publication 936 - Main Content
- "Principles of Real Estate Finance"; Charles Long; 2010
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