Q

What's a second mortgage?

A

It means borrowing more money against the equity currently in your home.

Generally, when you hear someone’s talking about taking a “second mortgage” for something, the announcement will come accompanied by a big sigh, because second mortgages are usually taken for big-ticket items like medical bills, higher education, or pricey home renovations — stuff that we all wish we could afford without borrowing even more money.

A second mortgage is just a colloquialism for what’s technically known as a home equity loan, which is when a bank agrees to loan you money using the equity in your home as collateral. Equity is simply the value of the percentage of your house that you — and not the bank — owns, a number that can be arrived at by subtracting how much you owe the bank from the current value of the house.

A second mortgage works like this: a bank will loan you a set amount of money at a set interest rate for a set period, normally shorter than the term of your primary mortgage. These loans generally, though not always, must be paid off in a shorter period of time than your primary mortgage. Depending on the bank, you should expect to be able to borrow a maximum of 70-80% of your total home equity. Accessing this kind of money all at once can feel like manna from heaven. But there are obvious dangers in tacking on a second monthly payment that absolutely must be made in order for you to keep your house. Because if you do default on a home equity loan, regardless of whether you’re up to date on your primary mortgage, your home equity lender could initiate foreclosure proceedings in order to get its paws on the collateral you put up to secure the loan.

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