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How Does a Second Mortgage Work?

The what, how and disadvantages of a Second Mortgage

If you're looking to raise money, whether it's to buy a second home in Orange County, California or for practically any other purpose, a second mortgage may be the solution. Of course, as is the case with any type of loan, there are pros and cons, so let's consider how second mortgages work and talk about some of the advantages and disadvantages.

What is a Second Mortgage?

It's exactly what it sounds like - an additional mortgage on your home. A second mortgage is secured against the property, and the use of the term "second" simply means that this loan doesn't have priority if you should happen to default. If you default, your first mortgage takes priority, and has to be paid off before any funds can be allocated toward the second mortgage.

Why Consider a Second Mortgage?

You might wonder why anyone would want to take out a second mortgage loan, and possibly risk their home by doing so. Usually, a second mortgage loan is considered when a person needs a significant amount of money. Ready cash isn't available, and other sources of credit don't provide the amount needed.

Assuming that you've paid off part of your mortgage, or the value of your home has increased, you may be able to get a second mortgage loan because your home serves as collateral.

Some of the reasons for taking out a second mortgage include:

  • Debt consolidation
  • Home improvement
  • Buying an additional home

People also sometimes use second mortgages to finance other endeavors - perhaps a business startup, or to help a family member who's fallen on hard times. Sometimes, a second mortgage loan isn't a good idea. You have to remember that you're using your home as collateral, and if you default, you could lose your home. That said, a second mortgage is a relatively easy way to get money when it's really needed.

Disadvantages

Second mortgage rates might be slightly higher than the original mortgage. This is because the risk is higher - the second mortgage, in the event of a default, can't be paid until the first mortgage is satisfied. However, the second mortgage rates will still be lower than most other sources (credit cards, for example, or unsecured personal loans).

Again, and it can't be overemphasized, a second mortgage does put your home at risk. If you can't pay it back, your lender can foreclose and you can be compelled to vacate the property. If you're considering a second mortgage loan, make sure that whatever you intend to do with the funds is worth the attendant risk.

Where to Get a Second Mortgage

Almost any lender will give you a second mortgage loan. It's what lenders consider to be a "big ticket" item, and they'll make a lot of money by giving you one. Start with your existing financial institution, or from the lender who holds your primary mortgage. Sometimes, by keeping all of your business in one location, you can save a bit on fees.

Online lenders and mortgage brokers are also potential sources for second mortgages. When considering a second mortgage loan, it's always best to compare before you commit. Make sure you fully understand up front what fees are going to be involved and what the second mortgage rates are.