A Second Mortgage is an additional taken out with a different mortgage lender on a home that is already mortgaged. It is referred to as the second mortgage because the primary mortgage loan is the loan that you took out to buy the property.
This type of mortgage uses the equity on your home. The equity here is the market value of your property relative to any balances left on your loan. It is possible that equity can increase or even decrease, but most of the time, the equity will grow. There are different ways in which equity can change such as:
- The equity can increase due to the high real estate market or you have done renovations to improve your property.
- Regular payment of your loan can increase the value of equity.
- Equity can decrease when you take out a loan against your home or that its value depreciates.
Advantages of Second Mortgage Loan
You’re probably considering whether you should get a second mortgage or not. There are significant benefits to getting one such as:
- Lower interest rates. Compared to other types of debt like credit cards, second mortgages tend to have lower interest rates. This is due to the fact that the risk is lower to the lender. This is not the same when you are taking out a loan on credit cards or other unsecured personal loans. Usually, the interest rate for the second mortgage is a single digit.
- Loan amount. Applying for a second mortgage may increase the amount that you can borrow because it is secured by your home.
Disadvantages of Second Mortgage Loan
Although getting a second mortgage has several advantages, there are a few trade-offs too. Take note of these below.
- Possible foreclosure. The problem with the second mortgage is that your home is at stake. If you are not able to pay regularly, the lender may take your home through foreclosure which obviously has a negative impact.
- Interest cost. There is always an interest that you will need to pay when you take out a loan. And although the interest rate for second mortgage is lower than that of a credit card, it’s still considerably higher compared to the primary mortgage loan. This is why you should take this into account if you are going to apply for a second mortgage to ensure that you know exactly what you are exactly up against.