Considering a Second Mortgage?

A Home Buying Article Contributed by Elizabeth Fox-Wise

If You are Considering Taking a Second Mortgage You are Not Alone

With the low interest rates that have prevailed in the 2000s, the number of second mortgage applications has exploded. America has not seen mortgage interest rates this low for well over a decade, making many home owners decide that now is the time to take a second mortgage.

While a second mortgage is typically at a higher interest rate than a first, or primary, mortgage, the interest rates are still very good right now. Some mortgage lenders are offering second mortgage interest rates as low as 5%.

The higher your equity to debt ratio, the lower the interest rate you may be able to obtain for a second mortgage. A second mortgage is usually at a higher interest rate than the first mortgage because the second mortgage carries more risk to the mortgage lender. If the homeowner can not keep up with the mortgage payments and the house gets sold, the first mortgage has priority over any money received for the home and the second mortgage can only be paid after the first mortgage is paid.

Therefore, if you have your first mortgage paid down lower than the value of the home, there would be less risk to the lender of the second mortgage and you could bargain for the best rate.

Be Cautious of a Second Mortgage That Puts Your Debt over the Home Value

Since mortgage lenders know that these low mortgage interest rates will not be available forever, many of them are allowing home owners to take a second mortgage which, when combined with the property's first mortgage, puts their debt at 125% of the value of the home.

While this may be attractive because it puts more money in your pocket at the low interest rate, it can be a very dangerous situation for a home owner to get himself into. If you find you can not keep up with both of your mortgage payments and your property gets foreclosed on and sold for the debt, you will never get enough money to pay off both mortgages. Then you are stuck with no home remaining mortgage debt to still pay off.

If a Second Mortgage is Taken to Pay off Credit Cards Watch Future Spending

Another way that homeowners get into trouble with a second mortgage is when they use the money to pay off high interest credit card debt, but then charge that debt back up again.

Paying off high interest credit card debt with money from a low interest second mortgage, may be a good financial move, saving you hundred or thousands of dollars in interest payments. However, then you must restructure you budget and change your spending habits. If you go out and charge up more debt on your credit cards, you are then in a situation where you have high credit cards to pay, your first mortgage, and a second mortgage on top of it. Paying the short term credit card debt off with a second mortgage, is only turning it into long term debt and your home is the collateral.