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Understanding the Basics of Second Mortgages

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When you buy a home, over time that home will gain value that you can borrow against later. The act of borrowing against the home’s gained value is commonly referred to as “taking out a second mortgage.” This is a form of debt that can be utilized wisely by homeowners to consolidate debt or get the money to conduct major renovation projects around the property.

Generally speaking, second mortgages are considered to be a pretty risky move. This is because you will owe the value of your second mortgage as well as the first – typically at a higher interest rate, too. If a homeowner defaults on their mortgage, the priority will be to get the first mortgage paid. Oftentimes this results in homeowners being on the hook for the value of their second mortgage.

Types of Second Mortgages

There are two primary “types” of second mortgages that individuals can take out against the equity of their homes.

Home Equity Line of Credit (HELOC)

While a lump sum is a large amount given at once, a home equity line of credit can be gradually drawn from as you please. This type of second mortgage is available if you have a conventional mortgage loan, meaning that you paid a minimum down payment of 20% when purchasing the property.

Lump Sum

Receiving the value of the second mortgage in a lump sum payment is typically the easiest and most straight-forward way to get the money you need, especially if you will be spending a large portion of it on renovating or otherwise improving the property. This is the “standard” option that most people choose. If you have the option of receiving a lump sum payment and have large, expensive renovation projects in mind, this could very well be the right option for you.

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