Second Mortgage

A second mortgage is to a first mortgage what a concubine is to a legitimate spouse. The concubine is important, but the woman you married before you even knew her must be taken care of first.

Like the concubine, a second mortgage takes second position to the first mortgage and it also represents a considerable risk.

Second mortgages will typically have a higher rate than first mortgages. This is because they generally represent a higher risk for an investor or lender.

If a property goes into foreclosure, the first mortgage must be paid in full before the second mortgage holder can be paid. In other words if there are two mortgages and a property is sold, the proceeds from the sale will be claimed to pay off a first mortgage if there is still money owing to the initial lender.

Some homebuyers will get a second mortgage if they can’t get enough money out of their first mortgage or if they are able to get better terms on their initial mortgage by purchasing another smaller second mortgage. As an example, if you buy a house for $200,000 and your down payment is $40,000, you can decrease the down payment to $20,000 by getting an additional mortgage for $20,000.

In most cases there is no maximum to the number of junior or secondary mortgages that can be placed against a home or property but getting your hands on a second mortgage will depend on how much equity you have accumulated and how much you still owe on your initial mortgage.

Taking a second mortgage out used to mean that you were headed for real financial trouble, but now some people see it as a prime advantage of homeownership. These days people take out second mortgages to pay for a child to go to college, or to renovate or add additions to their houses.

Second mortgages have either adjustable or fixed rates, just like first mortgages and they can last anywhere from 5 to 20 years. Many people purchase 15-year second mortgages.

Usually the combined amount of your mortgages should not equal more than about 80 percent of your home's appraised value.

Opting for a second mortgage can be a great way to make your home work for you when you need money quickly but you should always keep in mind that since you are borrowing against it you run the chance of putting your house at risk.

Tips for Looking into a Second Mortgage:

  • Research fees, interest and rate caps to ensure that you are getting the best deal available
  • Evaluate costs that you will incur short-term as well as long-term
  • Don’t borrow any more than the amount that you need, whether it be to pay tuition expenses or add a pool to your backyard
  • Make sure you have enough to cover both the principal and the interest of your second mortgage so that the outstanding balance of the mortgage doesn’t end up growing. Be aware that this can sometimes happen with adjustable-rate mortgages.
  • Ask around at different banks and other financial institutions to see what sort of programs are generally available
  • Understand what your debts will be when you take on a second loan

Usually one of the biggest differences between second mortgages and first mortgages is that the former will usually carry a higher interest rate and last for a shorter period of time.

Normally second mortgages have a fixed amount and predetermined repayment terms.

Even though second mortgages do pose a slight risk, like concubines, they can be an extremely attractive option for people who know how to juggle them alongside their other commitments.