How does a standalone second mortgage compare to a second lien mortgage?

second lien mortgage

Are you a homeowner considering a standalone second mortgage or second lien mortgage? In this article, I’ll take you through what each term means and what the differences between them are.

What is a standalone second mortgage?

A standalone second mortgage is a type of loan where a homeowner borrows a lump sum of money against the equity they have in their home.

The borrower receives the entire loan amount upfront and typically pays it back over a fixed term with regular monthly payments, just like a primary mortgage.

Standalone second mortgages are often used for large expenses like home renovations, debt consolidation, or major purchases.

(This is different from a HELOC (home equity line of credit), as a HELOC is a line of credit here you make draws against the credit line, instead of borrowing a lump sum, and it is paid back differently (with sometimes a 10 year period of interest payments) as this article explains.)

What is a second lien mortgage?

A second lien mortgage simply refers to a mortgage that is subordinate to the first mortgage on the property.

Your initial mortgage – when you buy your home (or refinance your initial mortgage) – is the first lien on the property.

The lien priority comes into play in the event of a foreclosure. In the event of a foreclosure, the first lien mortgage takes precedence in terms of repayment, and the second lien holder will only receive payment after the first lien holder’s debt is satisfied.

Second lien mortgages include various types of loans, including standalone second mortgages as well as other home equity loans like HELOCs. The key distinction is their position in the hierarchy of debt on the property.

How do you qualify for a second lien mortgage?

For any type of second lien mortgage, including a standalone mortgage, you typically need:

Sufficient equity in your home: To qualify for a standalone second mortgage, you typically need to have a significant amount of equity in your home. Equity is the difference between the current value of your home and the amount you owe on your primary mortgage. Lenders usually require you to have at least 20% equity remaining after taking out the second mortgage (and is some cases, 25%).

A good credit score: Lenders want to see that you’re reliable with paying back loans.

A stable income: The ability to demonstrate that you can afford to repay the loan is very important.

What are the benefits of standalone second mortgages?

Access to cash: You can get a lump sum of money to use for various needs.

Lower interest rates: Second mortgages often have lower interest rates compared to credit cards or personal loans because the debt is secured against the value of your home which makes it less risky to lenders.

Tax Deductions: In some cases, some of the interest you pay on a second mortgage might be tax-deductible. Always check with a tax advisor for specifics.

In conclusion

A standalone mortgage is a type of second lien mortgage. A standalone mortgage differs from other second lien mortgage types, such as a HELOC, because it is a lump sum amount that is amortized like a first mortgage, instead of having an interest-only draw period.

In order to consider a standalone mortgage, you want to make sure you have enough equity in your home to cover the requirements.

A standalone mortgage can be a cost effective option if you are looking to borrow a lump sum loan compared with a personal loan or other unsecured debt because interest rates are usually much lower.