Second Mortgage



What happens when you need some cash, whether for an emergency, such as unexpected medical bills, or non-emergency, such as paying your child's college tuition? If you are a home owner, you may consider taking out a second mortgage on your home. A second mortgage is very similar to a home equity loan.


What Exactly is a Second Mortgage?

A second mortgage, as its name implies, is a mortgage that you can take out against the value of your house. Your current mortgage is considered your first mortgage. When you apply for a second mortgage, your home will be appraised. The amount that you owe on your first mortgage is subtracted from the appraisal value, and the difference is used to determine the loan amount.

You are not required to borrow the entire amount of equity in the home, if you only need $10,000, and you have $50,000 in equity available, you only need to borrow, and repay, the $10,000.

It is important to note that a second mortgage is not the same as a home equity line of credit. You will not be given an open line of credit to write checks on. You will be given a check for the loan amount, and begin a repayment schedule.

The interest rate of a second mortgage is typically higher than that of a first mortgage, although the second mortgage is normally paid off sooner. Second mortgages do not normally require the extensive paperwork and documentation that a first mortgage does, so the second mortgage process is normally quicker and less expensive.


When is a Second Mortgage a Bad Idea?

A second mortgage is not for everyone. Typical uses for a second mortgage are home repairs, tuition, and even vehicle purchases. Second mortgages should not be used to extend a lifestyle that you cannot afford, whether it is an exotic vacation or endless dinners out. If you are considering taking out a second mortgage to increase your cash flow due to job loss, think long and hard about that choice. While it may seem like an easy way to tide yourself over, you can quickly get in over your head, and defaulting on this loan will result in the loss of your home.

It may make sense to take out a second mortgage in order to pay off bad debt. If you have extensive credit card debt, and are not making progress in paying it off on a monthly schedule, a second mortgage may be a good move. You will most likely be paying much less interest on the second mortgage than you are on the credit cards. There are two nonnegotiable rules to consider before deciding to do this:

  • Once the credit cards are paid off, do not carry a monthly balance on them again, ever. While it may feel great to see that zero balance, and make you feel like you can afford to do a little shopping, remember - you basically transferred the balance to the second mortgage. You still owe the money. If you start racking up charges again, you will find yourself in the exact same spot as you were before, only with a second mortgage as well.

  • Do not take out a second mortgage if there is any chance that you will not be able to repay the loan. Transferring unsecured credit card debt to a mortgage puts you in a position where you could lose your home if you default on the loan. If you decide the risk is too great, transfer your credit card balances to the card with the lowest rate. Do not take out the second mortgage if there is any doubt about your ability to repay.


Second Mortgages

If you are a home owner, you may consider taking out a second mortgage on your home. A second mortgage is very similar to a home equity loan.