August 20, 2010, Newsletter Issue #232: Second Mortgage or Equity Loan

Tip of the Week

There is really no difference in the two loans, regardless of what they may be called. Legally, an equity loan could be a first, second, or even third mortgage. However, for a number of reasons, most equity loans are also second mortgages. Here’s why.

Most first mortgage loans are sold, or written to be sold, into the “secondary market.” The Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) purchase the majority of first mortgage loans so their regulations are the basis for all other buyers, also. There are many built-in protections for both mortgage lenders and borrowers that ensure the validity of both the mortgages and the loans. Equity loans/second mortgages are normally written without many of these protections (title insurance, in-depth title examination, plot plan or survey, etc.) to make giving and getting these loans easy, fast, and at low cost to the borrower. Second mortgage/equity lenders can do this because they have the comfort of knowing that a properly recorded first mortgage is already in place on the subject property. Lenders don’t need to duplicate protections that already exist which saves them – and you – money.

It is possible that an equity loan/second mortgage can become a first mortgage in the future. Say you pay off your first mortgage while leaving your equity loan/second mortgage in place. It becomes a first mortgage – since it is the only one recorded – on the day your first mortgage is discharged (paid off). But equity loans will normally only be made if they are in “second position” which by default makes them second mortgage loans.

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