All about Second Mortgages

Having a better understanding of what a second mortgage is will help you in the refinancing process. We'll explain everything homeowners need to know about second home loans.

What It Is

Refinance My Second Mortgage uses the terms "second mortgage" and "home equity loan" synonymously, as they both refer to loans against a property in excess of the primary mortgage. Because first mortgages always take priority with regard to repayment, most lenders regard second mortgages as riskier loans. For this reason, second mortgages often have higher interest rates and more points associated with them. Borrowers often confuse second mortgages with mortgage refinance loans. Refinancing loans on a first mortgage only renegotiate the rates and terms of the primary mortgage, whereas second mortgages are additional loans that borrow against the equity in the home.

Crunching the Numbers

When you take out a second mortgage, you cash in on the equity you've built in your home. For instance, if you've paid $30,000 on a $150,000 mortgage, you have $30,000 of equity that you can borrow against, in theory. However, most Refinance My Second Mortgage lenders will not allow consumers to borrow 100% of their equity because of the significant risk involved. Instead, most lenders extend second mortgages worth 50%-80% of the homeowner's equity. Second mortgages are a relatively low-interest source of cash because the loan is secured by your home. This makes them popular alternatives to credit card debt or unsecured personal loans.

When to Take a Second Mortgage

In some cases, you do not have to have significant equity in your home to take out a second mortgage. In fact, a Refinance My Second Mortgage lender may allow you to take out a second loan at the same time you are applying for your first. For instance, if you only have a down payment of 15% and need 20% to qualify, you might take a second mortgage to borrow the extra 5% you need to get approved. On the downside, taking out a first and second mortgage at the same time can prove quite complicated, and the tax consequences are equally complex. If at all possible, then, you should wait until you have some equity in your home to take on another mortgage.

The Risk

As homeowners tax their equity further with second and even third mortgages, the interest rates and penalties tend to get steeper. The ramifications of overtaxing equity are serious-borrowers could end up with negative equity or even faced with foreclosure. Negative equity refers to owing more on a property than it is currently worth. Before you tap into your equity, it's important to remember that you could lose your home if you fail to repay the loan.