My friend said her house is fully paid off, there is no mortgage left to pay, but she needs to take out a second mortgage to get approved for a loan or something like that.
What is a second mortgage? How do they work?
In: Economics
A second mortgage is a loan against your house.
When you buy a house, you take out a mortgage to pay for it- you are basically borrowing against the house you are about to own in order to get the full price of the house necessary to make the purchase.
Once you have the house, you are slowly paying off the loan, and building equity- basically the difference between what you owe, and what you can sell the house for right now. (this is a combination of the value of the house increasing, and the money that’s actually going towards paying off the loan and not just paying the interest)
A second Mortgage is just a loan that borrows against whatever equity you have in the house- if you were to default on either loan, the house would be sold, and each mortgage company would pay itself off from the money that was made by the house being sold before finally giving you whatever was left over.
The way they work is, the company giving you the second mortgage will look at what you owe on the house, look at what they think the house is worth, and loan you up to something like 80% of the difference in value- assuming they think you can actually manage to pay them off (after looking at any other outstanding debts you owe, how much income you have, etc… they will work with you on that kind of thing)
Technically it’s still called a second mortgage even when the original mortgage is paid off, but more or less follows the same processes as a first mortgage.
As to what it’s for… pretty much anything you want! you could be taking out a second mortgage for:
debt consolidation (got some high credit card balances? a nasty auto loan? the second mortgage probably will have a lower interest rate, and give you a single monthly payment)
home improvements (you want your house to be nicer? need a $20,000 renovation but don’t have funds on hand? it’s an easy way to get the money for that, and the banks know that’s only going to increase the potential value of the home)
Kid going off to college (sure, you could take out some student loans, but the debt from a student loan is the most toxic awful thing in the world- at least this way, you’re only risking your house, not putting your children and your children’s children into debt until either someone finally pays it off or your entire family tree is dead)
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