Second Mortgage

A second mortgage is typically used by homeowners in order to cash out some of the equity in their home. Second mortgages can be used to pay for education, medical bills, debt consolidation and other expenses. The first step to understanding if a second mortgage is right for your is learning the basics.

Second Mortgage Definition

A second mortgage is a loan in addition to your original mortgage wherein your property serves as collateral. If you default or foreclose, the original mortgage lien holder would be paid first and your second mortgage lender would be paid second from the proceeds from the sale of your home. Because of this, the terms of a second mortgage are often determined depending on how much equity you hold in your home. (Second mortgages are also referred to as home equity loans.)

Like your original mortgage, second mortgages are lump sum, amortized loans. Unlike revolving credit, you get the entire amount of the loan at once and you repay it on an amortization schedule.

Second Mortgage Advantages

The advantage of a second mortgage is that it allows you to turn your home equity into cash which can be spent elsewhere. For many families, the home they live in is the single most valuable asset they own. However, you cannot use your home’s value to pay bills, buy groceries or purchase a car. A home equity loan or second mortgage allows you to convert your home’s equity into a liquid asset that can be used to pay for other expenses. One popular use of a second mortgage is to improve upon your home. In this way, you are using the loan to invest directly into your home’s value. If done right, a second mortgage can pay for itself.

Second mortgages are often viewed as alternatives to personal loans, home equity lines of credit (HELOC), credit cards and remortgages. In general, second mortgages have lower interest rates and better terms than unsecured debt, such as a credit card. Also, because you are getting your loan in one lump sum, you often pay a fixed-interest rate, rather than a variable interest rate that fluctuates month-to-month (as do most HELOCs). Furthermore, second mortgages are often exempt from origination fees that are associated with remortgages and refinancing, especially if you get a second mortgage from the same lender that gave you your first mortgage. Second mortgages are much easier to qualify for than your original mortgage. Because of this, second mortgages are best for smaller, shorter term loans.

Second Mortgage Disadvantages

A second mortgage has its disadvantages as well. Because second mortgages are riskier for the lender than the original mortgage, you will often pay higher interest rates than you do on your first mortgage. Traditional second mortgages are also a bit less flexible than home equity lines of credit, in that you have a set amount of money you receive, rather than a revolving line of credit you can draw from as needed. Because of this, it is best to know exactly how you plan on using the cash from a second mortgage and how you plan on repaying it.

Conclusion

A home equity loan or second mortgage allows you to cash out some of the equity in your home to pay off bills or invest in your home, business or another venture. Second mortgages are often easier to get than your first mortgage and offer more flexibility than a refinance. However, second mortgages often have higher interest rates than a single mortgage. The best way to use a second mortgage is to have a specific purpose for the money and a repayment plan mapped out.

For more information on second mortgages, including tips, advices and guides, check out some of our second mortgage blog posts:

Buying a New Home - Bridge Loan vs. Home Equity Loan

Getting a Mortgage - What If I Lose my Job?

Second Mortgage vs. Home Equity Line of Credit

Top Three Reasons Not to Refinance Your Mortgage