5 Lessons to Learn About Second Mortgages

If you own your house, or even if you don’t, you might have heard the phrase “second mortgage” floating around and be wondering what that even means and why you would ever want or need one. Well, look no further because here is the low-down on second mortgages.

1. What is a second mortgage?

A second mortgage is a loan against your home or property which comes secondary to your primary mortgage – what you would have negotiated when you purchased your home. It uses the equity you would have built up on your house over time as you have been paying off your primary loan or if the value of your house has increased due to market fluctuations.

2. What are some advantages of a second mortgage?

Unlike credit cards and other lending options, second mortgages can be used to borrow a larger sum of money. Since you are using something to secure the loan (your property), lenders are willing to give you a little extra.

Interest rates on a second mortgage will be lower than a credit card or other types of unsecured debt. Again, the risk is a bit lower for the lender since your house is collateral, so lenders are willing to lower the interest rates a bit.

You don’t have to renegotiate your primary mortgage. This is great if you like the deal you have made with your current mortgage and don’t want it to change. There are also some positive aspects to not renegotiating your mortgage, like lower interest rates and other benefits.

There can be some tax advantages to having a second mortgage. You can often write off the interest of your loan come tax time.

3. What are some disadvantages?

 

Since the loan is against your property, that means if anything happens and you can’t pay what is owed, your house is on the line.

Interest rates may be lower than other types of debt, but they are usually higher than on a primary mortgage because it is in second position. That means that if the loans weren’t getting paid and the house was repossessed, the primary mortgage would be paid in full first and only then would the second mortgage get paid. So, the second mortgage runs the risk of not getting paid or not getting paid the full amount owed.

More payments. Instead of paying just your mortgage every month, you’ll have to pay two. This could be overwhelming if you’re struggling to make payments.

Initial fees and costs. There are loan origination fees, appraisal costs and lending fees, among other charges. Make sure to ask how much you should be expecting to pay for these additional costs.

4. What do you do with a second mortgage?

Since a second mortgage is a loan, the money is yours to spend however you please. That being said, however, in general people use second mortgages for things like consolidating all of their debt, home renovations, or education. People also use second mortgages to avoid paying PMI (Private Mortgage Insurance) on their first mortgage.

5. Where can you get a second mortgage?

You have a few options when it comes to finding a lender for a second mortgage. You can go to a bank or credit union. You may have to try a few – getting a second mortgage is a bit more difficult than getting your primary mortgage.

You could also try a mortgage broker or an online lender if you don’t think going with a bank is your best option.

There is a lot to know about getting a second mortgage before jumping in, but if you do your research, it can be a good option for your borrowing needs.

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