What is a second mortgage and how does it work?
October 26 2017
You've probably heard of second mortgages. You might even be considering applying for one. But do you know exactly what they are and how they work? Keep reading to learn more about this option and see if it's right for your situation.
What is a second mortgage?
It's another mortgage where your home is used as collateral, just like with your original loan. If, for some reason, you are unable to pay your original mortgage and must sell your home to pay off debts, the second mortgage is paid off after your first one. This is why second mortgages often have higher interest rates.
Why get one?
One of the most popular reasons for taking out a second mortgage is to fund home improvements or repairs. They're typically called home equity loans or home equity lines of credit (HELOC). You must have enough equity in your home to qualify for this type of loan.
Some people apply for a second mortgage when they purchase a home to avoid paying private mortgage insurance (PMI). Most homebuyers must have at least a 20 percent down payment to avoid PMI. Taking out a first mortgage for 80 percent and a second mortgage for 20 percent is one way to waive that cost.
Should you get a second mortgage?
Just like any other financial decision, there are several factors to consider before going that route. For example, if you're considering a second mortgage to pay off existing debt, make sure you can afford the monthly payments.
If you have questions about this type of loan or would like to apply for one, please reach out. We're here to help!