What is a Second Mortgage

You are about to find out what the big deal is about real estate investment. When you own a property, there are pretty good chances that you can mortgage it for more than one loan. Second mortgage is just that. When a person finds himself in urgent need of financing, he can mortgage his property again to get a loan sanctioned from the lender.

What is a Second Mortgage?

Now let us try and understand what is a second mortgage loan and what are the conditions in which the lender will sanction it. Second mortgage is, like the name suggests, a loan taken where the asset/property is mortgaged for the second time. Simply, it is a second loan taken on the mortgaged property. It is also a secondary mortgage in the sense that, in case there is a default on the loan, the property will be sold and the proceeds will be used to pay off the first loan. The remaining proceeds from the foreclosure, if any, will be used to pay off the second mortgage. So the second mortgage lender runs a risk that he may not recover the money he lent. So as this is a risky proposition for the lender, a second mortgage rate is understandably higher.

But how does a second mortgage work. A second mortgage has its share of restrictions. For instance, you don't get to decide the amount you will get for your second mortgage. The amount of a second mortgage is decided by the built up equity. The built up equity on a property may be defined as the difference between the market value of your home and the amount of mortgage payments due. Hence, if your property is worth $100,000 and your outstanding mortgage payments are $65,000 then you will receive an amount of $35,000 for your second mortgage. Sometimes, although very rarely, there is a chance that the lenders will allow your total debt to go up to 125% of your property value. In this case, you can obtain an amount of $60,000 on your second mortgage. But the chances of that are very rare in the present circumstances and requires an excellent credit history. But second mortgage rates of interest are very high and it is a risky proposition overall for both you and the lender.

Advantages of a Second Mortgage

• The main advantage of second mortgage is that you can avail financing when you need it, despite having mortgaged your property once. You can obtain financing for whatever reason by mortgaging your property the second time. Using this amount to facilitate purchasing another asset would be a good idea.
• A second mortgage buys you time. Suppose you realize that you aren't going to be able to stick to your mortgage payments commitment, you can quickly take up a second mortgage to help you pay off the old mortgages.
• A second mortgage can be used as a Home Equity Line of Credit (HELOC) to make improvements to the home.
• If you had taken your first mortgage at a higher interest rate, your second mortgage interest rate might just be lower, if the overall interest rates have fallen.

Disadvantages of a Second Mortgage

• A second mortgage puts your home in more risk. If you are drawing an amount more than your property cost, there is a chance of bankruptcy
• Although I mentioned a point before about a lower interest rate, the chances of that happening are very, very rare and most probably you are going to get stuck with a pricier loan.
• If you obtain a 125%-of-property loan, then the interest payment on that extra 25% is not tax deductible.

So this was all about what is a second mortgage. Recent policies have decreed that the second mortgages be made cheaper so that the people can pull themselves out of the current financial crisis. But remember, this financing has to be used with caution and responsibility. People have to use this money responsibly to rebuild their finances and not squander it away.