Mortgage Dictionary -> Second mortgage
Most American homeowners have a single mortgage, but an increasing number of people are taking on second mortgages. They do so for a variety of reasons, but the biggest one is to get more money.
Unfortunately, like every other kind of mortgage, there are risks associated with getting a second mortgage, which is why people are wise to take the time to learn a bit about them before signing up for one. You'll learn the essential information about second mortgages here.
The Definition of a Second Mortgage
A second mortgage is simply another loan taken out on a home in which there is already an existing mortgage. In the case of the second mortgage, the home itself serves as collateral. What separates a second mortgage from a primary mortgage is that the second mortgage has less priority than the first one, and is usually worth a considerable amount less. The other big difference between the two is the second mortgage actually gives you the money, whereas the first mortgage pays for the home.
What You Need to Know about Second Mortgages
- They're Quite Useful if You're Planning on Home Improvement. With the sagging economy, most homeowners cannot afford to do necessary upgrades on their homes, and this is where a second mortgage comes in handy. It is essentially like cashing in on the value of your home, as when you get a second mortgage, you'll be given the equity of your home and will be free to spend it as you wish.
- It Does Need to Be Repaid. Yes, it's true that the second mortgage doesn't have as high a priority as the primary mortgage, but it still needs to be paid. If you default on it, it can have bad effects on your credit and may even result in foreclosure, so be sure to pay both mortgages if you get a second mortgage.
- The Interest Rates are Usually Higher. Because second mortgages are riskier for lenders than first mortgages, the interest rates are significantly higher. Remember, you're going to pay back both loans, so having a ridiculously high interest rate on one of them will make it much harder to pay it off. If the need for cash is dire enough, even higher interest rate second mortgages are still good.