Second Mortgage Information

When you first hear about a second mortgage, you may wonder why anyone would consider such an idea. However, taking out a second mortgage may actually be a wise financial move for those in a stable financial position who have acquired significant equity in their home. Second mortgages are also known as equity loans, and they may enable you to use your home equity for large financial purchases such as college tuition or home improvements.


A second mortgage is a home loan that is based on home equity. Whereas a first mortgage uses the home as collateral, the second home uses equity as collateral. Borrowers apply for a certain amount of money from their equity, which they then pay off over the term of the loan. Although second mortgages used to be difficult to attain, borrowers with a high amount of equity, solid credit scores and steady employment usually have no difficulty getting a second mortgage in contemporary times.

Pros and Cons

Naturally, a second mortgage makes default much more serious. If borrowers default on both their first and second mortgages, they will lose their home as well as any equity they may have acquired. According to CNN Money, second mortgages are ideal for one-time expenses and should only be considered by those with solid, dependable income and financial history. "If your reason for taking out a loan or line of credit is to help pay for years of living above your means and you haven't taken steps to rein in your spending, you shouldn't put your home at risk."

Second Mortgage vs. Refinance

A second mortgage may sound very similar to home refinancing. Indeed, the two are very much alike. However, unlike refinancing, a second mortgage does not replace the first mortgage. In the case of default, the first mortgage must be paid first, followed by the second. A second mortgage adds a monthly payment, whereas a home refinance replaces the first mortgage payment. You should also compare refinance interest rates, which can be substantially higher or lower than second mortgage rates, before deciding which is preferable.

Loan Terms

According to iMortgage Guide, second mortgages tend to have higher interest rates than the first, and may be for shorter terms of 15 years or less. However, like a first mortgage, second mortgages usually have fixed interest rates and a fixed monthly payment. Some second mortgages may end with a balloon payment--a large lump sum of money that competes the repayment. Be sure to thoroughly discuss all terms with your second mortgage lender.

Loan Process

Although a second mortgage does not require as extensive paperwork as does a first mortgage, the process is quite similar otherwise. As with any loan application, be sure that you research second mortgages thoroughly and shop around for the best interest rates and loan terms. Usually, borrowers will need to have a home appraisal to finalize the process.

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