Homeowners Often Take a Second Mortgage As a Means of Accessing Cash at Low Interest Rates

A Home Buying Article Contributed by Elizabeth Fox-Wise

What is a Second Mortgage?

A second mortgage is, by definition, a mortgage which is taken against property that already has an existing first mortgage on it. The first mortgage is the primary mortgage and as such has priority in all claims to the property. The second mortgage is subordinate to the first, or primary mortgage.

A second mortgage is any loan that places a second lien on the property. Most second mortgages are taken for a fixed dollar amount which is paid out in one payment at the time or mortgage loan approval. Just like primary mortgages, a second mortgage can be gotten with either a fixed or variable interest rate.

Why Take a Second Mortgage?

A second mortgage is a good way for a homeowner to access cash at a lower interest rate than other types of loans, such as personal loans, small business loans and high interest credit cards. Although you can not typically get a second mortgage for as low of an interest rate as a primary mortgage, the rates are still better than many other choices. A second mortgage is usually at a higher rate than a primary, or first, mortgage, because it carries a higher risk level for the lender.

In the event that you were not able to pay off your mortgages, the lender of the first mortgage would get paid first from the sale of the house and the lender of the second mortgage would only get paid if there was any money remaining after the primary mortgage was paid. Typically, the higher the risk level, the higher the interest rate.

The primary reason that homeowners give for seeking a second mortgage is to save money. They apply for a second mortgage and then use the money from the second mortgage to pay off higher interest rate debt.

Another popular reason for taking a second mortgage is to access to cash to fund something coming up such as a child's college tuition or wedding.

Disadvantages to a Second Mortgage

A second mortgage is taken against your home; therefore, should you not be able to pay it back, your home is at risk. This is the primary reason that some homeowners to do turn to a second mortgage.

Another disadvantage to a second mortgage is those homeowners that have a problem with running up short term debt, such as credit card debt. If they take a second mortgage to pay off the high interest credit cards, they are rolling their short term debt into long term debt. This is alright if the lower interest rate saves the homeowner money, and if it is only one part of a strategic budgeting plan.

The problem occurs all too often, however, that the homeowner clears his credit card debt with the money from a second mortgage, but does not change his spending patterns. In no time at all, the homeowner has charged up just as much short term debt on his credit cards again, but this time he also has the second mortgage to pay on monthly as well.