The Subtle Difference between 2nd Mortgages and Secured Loans

Michelle Tuvey Michelle Tuvey | Loan Underwriter

The terms '2nd mortgage" and 'secured loan' are used so interchangeably that a lot of us think they are one and the same. They are not. There are some subtle differences that make 2nd mortgages very distinct from any other kind of secured lending. They are differences borrowers should be aware of if they are looking to take advantage of the equity in their properties to address high-volume financing needs.

By definition, a 2nd mortgage is a conventional mortgage loan that could be worth tens of thousands of pounds to the property owner. It is called a 2nd mortgage because it takes second place behind a primary mortgage in terms of lien priority. Otherwise, the loan is virtually identical.

A secured loan is different in a number of ways. First, while most secured loans are acquired by using equity as collateral, that does not always have to be the case. A lender could accept any kind of collateral they wanted to secure the loan. Second, a secured loan is more like a fixed credit line than a mortgage product. It is governed by slightly different rules as well.

Most of us are familiar with the idea of secured loans for the purposes of making home renovations or consolidating debt. Equity is used as leverage to borrow tens of thousands of pounds, which is then paid off over the term of the loan. Secured loans are great tools because they give borrowers access to higher volumes of money at affordable rates and with acceptable terms. But what about 2nd mortgages? What are these used for?

Business Opportunities and Investments

More often than not, 2nd mortgages are used to finance business opportunities or investments. A homeowner might decide to take out a 2nd mortgage in order to fund a start-up company he or she hopes to build into a viable business that he/she can eventually pass on to his/her children. The 2nd mortgage is the perfect tool for this because it enables that individual to raise all the money needed based on the value of his/her property.

Another common use of the 2nd mortgage is to purchase a second home. Consider a young couple who has been priced out of the housing market due to higher prices and stricter borrowing requirements. They have little hope of buying a first home much before their 40s. Parents could step in and use a second mortgage to purchase a home for the couple and then rent it back to them. Rental payments cover the mortgage; the parents turn the house over to the couple once the mortgage is paid in full.

Under this kind of arrangement, the parents are essentially acting as a bank for the young couple. That said, there are lots of restrictions banks place on 2nd mortgages of this nature so as to protect themselves in the event of default. But such an arrangement has helped many young couples get into the housing market.

Do Your Research

The differences between 2nd mortgages and secured loans may be very subtle, but they do exist. It is necessary for borrowers to do their research before deciding on the kind of financing they want to obtain. Both types of loans have their advantages and disadvantages that may apply to borrowers differently.

In the end, anyone planning to take out a 2nd mortgage or secured loan has to be absolutely positive the resources to pay back the loan are in place. Otherwise, any property securing the loan could be in jeopardy. That is the last thing anybody wants.

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