What is a Second Mortgage?
What is a second mortgage? A 2nd mortgage is a loan taken out against a property that comes after a primary loan (or first mortgage).
For example, most people finance their homes with a single, or first, mortgage. A second mortgage loan can be taken out to provide additional financing for the home, or give the homeowners access to additional funds for renovations, repairs, or other needs.
Is a 2nd Mortgage an Acceptable Way to Finance a Home?
Second mortgages are indeed used to help finance homes.
One common method to use 2nd mortgages is to create a piggyback loan. This is when you take out two mortgages to pay for a home, so you can avoid having to save up 10-20% for a down-payment. Homeowners using this piggyback loan take out a primary mortgage for 80% of the home's amount, and obtain a second loan for the remaining 20%.
(One can also take out a first loan for 80%, a second loan for 10%, and provide a 10% down-payment, or any other combination).
What Are the Benefits of Second Mortgages?
One benefit is the ability to avoid a down-payment with a piggyback loan.
You can also use 2nd mortgages to open up a home equity line of credit, which taps into your home's equity and gives you access to cash that you can then use for a variety of projects and purposes. A HELOC is commonly used to pay for home improvement projects, for example, that can actually add value to a home.
You can refinance second mortgages just like you can first mortgages and take advantage of lower interest rates. You can also purchase foreclosed homes for sale using second mortgages secured with your own property.
Finally, a 2nd mortgage can help those with bad credit restore their credit record through debt consolidation programs, building a good credit.
There are things to consider with these mortgages, though.
Second mortgages are junior to first mortgages. In other words, the holder of a primary loan is paid off first, before the owner of a second mortgage. This could mean that the bank or institution that loans a second mortgage loan may not receive money in case the holder defaults.
Because of this, second mortgage rates often are higher because of the higher level of risk involved. A second mortgage rate is a factor to consider; use a second mortgage calculator to determine if it is a possibility for you.
Will a Foreclosure in my History Prevent me from Getting a 2nd Mortgage?
In some cases, second mortgage lenders will not provide you with a second mortgage or with second mortgage refinancing if you have had a foreclosure. Some will, however; the best solution is to find a lender who is willing to work with you despite your foreclosure.
Foreclosures will not always prevent you from obtaining 2nd mortgages. Talk with lenders to see if you qualify for their programs if interested in a second mortgage.