How do second mortgages work?

Second mortgages are taken if you have any home improvement plans or debts to pay off or simply put when you need extra finances. It is an additional loan taken against the same property. Such loans are considered riskier and hence lenders charge higher rate of interests on a second mortgage.

You may mistake second mortgage and refinance to be the same thing, but the truth is, they are different. A refinance means that you are renegotiating the terms of the first loan while a second mortgage means you are borrowing more money against the equity of your property.

How must you use a second mortgage?

Second mortgage is useful at times when you need a lot of extra cash. Home equity can earn you big loan amounts and hence most borrowers borrow on the equity of their home. You may need second mortgage for:

• Avoiding Private Mortgage Insurance/PMI


• Creating a credit on the home equity line


• Making home improvements


• Purchase of more homes


• Debt consolidation programs

Are there any disadvantages of second mortgage?

The disadvantages of second mortgage are listed below:

• A second mortgage can be dangerous for your home if you can't pay it back.


• They have a higher rate of interest compared to a first mortgage.


• You may have to pay huge second mortgage fees.

What are the types of second mortgage to choose from?

You can choose from the 2 types of second mortgages:

1. Home equity line of credit - This works in a similar format to a credit card where you (homeowner) will be given a line of credit based on the equity of your home. You will have to pay interests on the amount borrowed. This interest rate depends on the market index rates making it more unstable than home equity loan.

2. Home Equity Loan - It is a set loan amount that is fixed for a said term and has a set rate.

Second mortgages can be found almost everywhere. Lenders are willing to offer such loans as they can charge high rate of interests. You may seek second mortgage from a lender you are already working with. There may be some rate cuts and may also be able to save some money on fees.

Samantha Taylor is a contributing Financial Writer, Moderator and Community Mentor of MortgageFit. She has been an active participant in the forums wherein she offers mortgage advice and suggestions to people in loan problems. If you have a query on second mortgage related issues, you can simply discuss it with her in the Mortgage Forum.