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Second Mortgages - Advantages and Disadvantages

How Second Mortgages Work

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When you need money, sometimes a second mortgage is the answer. Second mortgages serve a variety of purposes, and are described with various names. This page is a basic overview of second mortgages, how they are used, and disadvantages of second mortgages.

What is a Second Mortgage?

You may be familiar with a plan-vanilla mortgage, so what’s a second mortgage? It’s simply another mortgage on your home – a loan secured against the property. The term “second” indicates that the loan does not have priority on your home in case you default. Instead, your first mortgage has priority and would be paid before any funds go towards the second mortgage.

How to Use a Second Mortgage

Why would somebody risk their home with a second mortgage? These types of loans are appropriate for times when you need a lot of money. You may not have unlimited credit on your credit cards, and finding the cash just lying around is difficult.

Where is there a lot of equity or value? In the home. By borrowing against a home, borrowers can get bigger loans. In addition, second mortgages may allow for bigger loans because the lender considers a loan against the home to be safer.

Some common uses for second mortgages are:

Some people use second mortgages for other uses – and sometimes they are not wise uses. It can be tempting to tap a large source of money with a second mortgage, but you have to remember that you’re borrowing against your home. In some cases, a second mortgage is the only way to pay for a need.

Disadvantages of Second Mortgages

The main disadvantage with second mortgages is that you are risking your home by using one. This is a serious risk: if you can’t pay the loan back, a second mortgage can be catastrophic. Make sure that your intended use of funds is worth the risk you’re taking by using a second mortgage.

Another drawback is that second mortgages have slightly higher rates than senior mortgage rates. This is because the second mortgage won’t be paid until the first one is (in the event of a default). Because the loan is riskier than a plain-vanilla mortgage, the rate is higher. However, the rate may be lower than alternative sources like credit cards.

Finally, you may have to pay hefty second mortgage fees. There are a lot of hoops to jump through and services to pay for. Depending on how much you need and how long you’ll need it, a second mortgage may not work simply because of the fees.

Where to Find Second Mortgages

You can find a second mortgage almost anywhere. These are big-ticket loans that lenders love. A good start is to shop a second mortgage with an institution you’re already working with – like your existing bank or credit union. Or, you can try to get your second mortgage from the lender that has your primary mortgage. This way, you can hopefully save a few bucks on fees.

Return to the main Get a Mortgage resource page.

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