Pulling Out Equity

This the most common form of second mortgages. You can apply for a second mortgage for the exact value of equity you have in your home. If you have a $200,000 home and your first mortgage is $150,000, then you have the ability to request a second mortgage in an amount up to $50,000. This would be a loan secured by your home, based on current market price.

At Purchase

A second mortgage is available when purchasing the house, and the buyer does not have enough to make the necessary down payment. For example, if the first mortgage requires 30 percent down but the buyer only has 20 percent available, the buyer could apply for a second mortgage to borrow the 10 percent needed to purchase the house. Theoretically, you are borrowing against the equity you are about to put down on a house.

Loan to Value

The allowed loan to value ratio is 125 percent. Thus a second mortgage that would bring your total loan amount up to 125 percent of the appraised value of your home is possible, but requires excellent credit. In this case, your entire equity plus another 25 percent of the cost of your home is what you are borrowing against. Naturally, this loan is difficult to obtain.

Line of Credit

All of the above loans can be taken as a line of credit. The applicant would not receive a lump sum, but have continuous access to the full loan amount, used mostly as revolving debt. In other words, if the line of credit is $100,000, the applicant can use $40,000 and repay the loan, and immediately access another $100,000.

Consider Carefully

As mortgages are secured loans (with your house as collateral), careful consideration should be given before borrowing additional funds. With housing price fluctuations, you could easily end up owing more on the house than it's worth. Keep in mind that mortgage loans are tax-deductible only to the appraised value of the house at the time of loan origination.

Source:

Federal Reserve: Home Equity Loans

Military Finance

E-Loan: Home Equity Loans and Line of Credit