A second mortgage is a mortgage taken out in addition to the first mortgage on a home. In many ways it is similar to a home equity loan because the second mortgage is secured using the home's equity. From a lender's perspective a second mortgage is more risky than a first mortgage because in the event of a default (foreclosure, bankruptcy, etc.) the first mortgage must be completely paid off before the second mortgage can receive any payments. Thus, the interest rates for second mortgages are higher than the interest rates on a first mortgage.
Similar to a first mortgage, a second mortgage can have a fixed interest rate or an adjustable interest rate. It's important to determine what your financial objectives are before commiting to a specific mortgage type. Think about what it is the funds from your second mortgage will go towards? Are you improving your home to increase its value? Or are you going to use the funds to go on vacation or fund college expenses?
Mortgage Purchase or Refinance
Costs to Watch Out for with a Second Mortgage
Just like a first mortgage, second mortgages have several costs associated with them (sometimes more). These can include appraisal fees, points, application costs, closing costs and title searches. Appraisal fees, application costs and title searches are usually pretty standard. The ones you'll want to watch carefully are points and closing costs. These are fees that a lender will charge for writing your mortgage. It's obvious that a lender wants to make the most money possible so it's a good idea to compare these fees with other lenders and negotiate them as much as possible.
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Other Things to Watch out for with a Second Mortgage
There are an additional number of facets regarding second mortgages that should be taken into consideration before signing on the dotted line. These include the APR, default penalties, prepayment penalties and balloon payments. This is where speaking to several different lenders comes in handy. Try speaking to a loan officer from a brokerage, bank and credit union. This should help to gain a good perspective on what is happening in the market in terms of interest rates. Default penalties, prepayment penalties and balloon payments should be avoided at all costs. Default penalties act much like those associated with credit cards. Your interest rate rises and your payment follows suit. Prepayment penalties can be a terrible thing if you need to refinance or plan on selling the home. This guarantees that the lender will make money even if the mortgage is paid early but does absolutely nothing for the borrower. Lenders also try to entice borrowers with an exceptionally low payment and cover over the fact that there's a balloon payment at the end of the loan. This is large, lump sum payment that must be paid all at once. Unless you plan on having this lump sum this should also be avoided at all costs.
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