Benefits and Risks of 2nd Mortgages

When you need a large sum of money fast, you may be attracted to the idea of a second mortgage. A second mortgage can provide you with enough security to take out a large loan, but it is wise to be aware of the risks they can involve.

What is a Second Mortgage?

When you purchase a home, you sign an agreement referred to as a mortgage. A bank will issue you a loan so that you may purchase the home immediately; you will then repay the bank with monthly installments to cover this loan. If at any time you fail to make your monthly payments on time, the bank that issued you the loan to purchase your house can confiscate the property.

A second mortgage is also a loan. As with the first mortgage, the borrower takes out a loan. He or she then agrees to make monthly payments in order to compensate the second mortgage lender. Again, the home is being placed as collateral. If the borrower fails to comply with the second mortgage agreement, the home will be foreclosed by the bank.

 Second Mortgage Loan Repayment

When you agree to a second mortgage, you will be required to pay off the senior mortgage first. This is the risk factor for the lender, and the main reason why second mortgages are sometimes more difficult to obtain. Even if you do not make your payments on the loan, and default, the second mortgage will not be paid back until the first lender has been compensated for his loan.

2nd Mortgage-pros and cons

If you are certain that you will be able to make the necessary payments promptly and in full, a second mortgage is a valuable vehicle for acquiring a large loan. Banks are more likely to approve a loan for borrowers who supply collateral such as a home. It provides a certain amount of security for the lender-if the borrower is not able to repay the loan, the bank can still be compensated with the security.

This is one of the major risks of a second mortgage home loan. A home is often the most valuable asset that a borrower has, thus confiscation of it can pose a considerable problem. Even if the borrower has already made payments on the loan, the home can still be foreclosed upon. Also, even if the loan was of a lesser value then the home to be foreclosed, the bank is still entitled to the entire home. This means that if you take out a second mortgage, and you have equity in the home, this equity will be lost when the bank forecloses.  

Another disadvantage that borrowers face when agreeing to a second mortgage is the considerably higher rates that are assessed. A second mortgage home loan is considered to be a more risky choice for a bank. Because of this, the lender will most likely charge the borrower higher rates than if the home was being secured for a senior mortgage. Second mortgage rates are still considerably less expensive then other rates for other lines of credit; a credit card, for example, does not provide sufficient security, and thus charges a higher interest rate than a second mortgage loan.

Finally, second mortgage lenders usually charge significant fees in order to process the loan. This process involves more complications than a senior mortgage, the rates you are assessed will depend on a variety of factors. Such factors incorporate the life of the loan, your current credit rating, and the amount of the loan.