Second mortgages

One of the benefits to home ownership is that it gives you the opportunity to use your home as collateral to borrow larger sums of money by taking out a second mortgage. This second mortgage is usually a secured loan that is subordinate to another loan against the same property. It used to be the case, that having a 2nd mortage on your home was a sign of financial troubles and was often looked down upon. However, that is no longer the case today, and applying for a second mortgage can be a great financial decision!

Second Mortgage vs. First Mortgage

In real estate, a property is able to have multiple loans (or liens) setup against it. Whichever loan is first registered with the county or city is known as the first mortgage. Whichever loan is registered second, becomes known as the second mortgage. If the mortgage loan goes into default, the first mortgage is paid off in full before any of the second mortgage is paid. Because of this, obtaining a 2nd mortgage is a little tougher, and often has a higher interest rate then a first mortgage beacuse of the increase risk to the lender.

A second mortgage is appropriate for times when you need a lot of money relatively soon. Some common uses for a 2nd mortgage are:

Debt Consolidation Programs
Home improvements or renovations
College tuition fees

Many people take advantage of a second mortgage or other uses as well, and some of those are not wise choices. It may be tempting to have a large sum of money available for a loan, but remember that you are borrowing agains your home, and that is something that you do not want to lose.

Choosing a 2nd Mortgage

When you are ready to apply for a 2nd mortgage, you can usually choose between three categories:

Traditional Second Mortgage
Home equity Loan
Home Equity Line of Credit

A home equity line of credit can be nice, because it allows you access to a large sum of money, but you do not need to take all of it upfront. You are able to borrow money as needed, up to an agreed upon maximum amount, but you are only paying the interest on the amount of money borrowed, not the full amount of the home equity line of credit.

Factors affecting a Second Mortage Application

Significant equity in the first mortgage.
Low debt-to-income ratio.
Solid employment history.
High credit score.

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