Second Mortgage
A mortgage is a loan that’s secured, usually by real estate. That means that if you can’t pay the terms of the loan, the property is sold to pay off the debt. A first mortgage is the first loan that is registered against a property. Real estate can have more than one mortgage but the second, third or subsequent mortgages are paid off after the first one. That makes second mortgages riskier than first mortgages.
Whenever a lender takes on more risk, they raise the interest rates to cover that risk. Generally, the rates on second mortgages will be higher than on first mortgages. So why would anyone take out a second mortgage?
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One reason is to have the term of the loan shorter. For example, if your primary or first mortgage is for 30 years but you need money for a short-term goal you can take out a second mortgage for only 10 years.
Another reason to take out a second mortgage would be if the rate on your first mortgage can’t be beat. For example, say you took out your first loan in June of 2003 when rates hit rock bottom and you have a 30 year loan at 5.23%. To refinance in 2006, you’d be looking at a rate of 6.3% or more! Instead of refinance the entire amount at the new rate, it might make sense to keep your old loan and take out a second mortgage. Only the new loan amount would be subject to the higher interest rate.
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As with any loan, make sure you understand the terms and conditions. If your second loan is variable rate, take the time to understand how the rate will change. How much can the rate change in one year? What’s the highest rate that can be charged. It’s easy to forget that in the early 80’s interest rates for 30 year fixed mortgages went up over 18%. While we all hope to never see those rates again, it pays to take the time and understand how high your rate can go.
Also, when you compare the costs of refinancing with a second mortgage, make sure you know the total cost of both options. Ask about points and closing costs so that you are comparing the total cost of both options. Remember any time you take out a loan on your home, you’re putting it on the line. Make sure you can live with terms of the loan.
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