A second mortgage is a charge over a property that already has another mortgage on it. The mortgages are ranked in the order in which they were lodged. In the event that the debt isn’t paid and the property is sold the lenders will receive their money in order of priority with the 1st mortgage being paid back before any money is paid to the 2nd or 3rd mortgagee.

Second mortgage loans fall into two main categories:  First category is home equity loans, where you borrow against the equity in your home to obtain funds for some purpose, and second is piggyback loans, which are used to supplement a primary mortgage when buying a home.

A mortgage is any loan backed by real estate as collateral; it doesn’t necessarily have to be a loan used to purchase the home. That’s why home equity loans are considered second mortgages.

They’re called a second mortgage because they’re a second lien loan, or of second priority to your primary, first-lien mortgage. In the event of a foreclosure, the primary mortgage/first lien gets paid off first. Any second mortgage only gets paid after the primary loan has been paid in full – they’re second in line for payment.

Advantages

One of the advantages of taking out a second mortgage is the ability to liquidate the equity in your home. If you are on the verge of bankruptcy, and you need to get access to cash to pay off high-interest loans and back taxes, taking a home equity loan might not be a bad trade. The interest payable on a home equity loan is usually lower than other types of debt because it offers the lender the security of your house. Depending on your situation, this could be an excellent way to lower the amount of debt you have and saving you money on monthly interests. Think of the second mortgage as an emergency lifeboat in this situation. Hopefully, you never need it, but you’ll be grateful for it if you do.

Disadvantages

Second home loans do have certain disadvantages. The main one is that, as with any type of mortgage, you could lose your home if you fail to keep up with the payments. It doesn’t matter if you stay current on your primary mortgage; your second mortgage lender can still foreclose if you fall behind on just your 2nd mortgage payments.

As noted above, 2nd mortgage rates are also higher than rates on a primary mortgage. So in some cases it may be better to do a cash-out refinance rather than take out a second mortgage loan. That’s particularly true if you can lower your primary mortgage rate by doing so.

Having a second mortgage loan can also block the refinance of your primary mortgage.  When you refinance your primary mortgage, your second mortgage loan becomes the first lien unless it is re-subordinated to the new primary loan. But second mortgage lenders are often unwilling to do that and lenders will not refinance a primary mortgage unless it will be a first lien.

The solution is usually to refinance the second mortgage by rolling it into the primary one and simply refinancing both of them. But you’ll generally need to have about 10-20 percent equity over and above the two mortgages in order to do that.

Because of all the risk associated with a second mortgage, they have gained an awful reputation among homeowners, but if done carefully, they can be an excellent tool. Just like with every other part of your finances, a second mortgage isn’t something that should be done lightly. Spend some time looking at your financial situation and weigh your options.

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