A second mortgage is another (secondary and subordinate to the existing first mortgage) loan that you take out using your home’s equity as collateral. It provides you with cash, but it deprives you of the owned by the time part of your home, partially or completely. You have to start buying out your home practically all over again, this time on different terms - the terms of the second mortgage. What’s in the terms?

The crucial distinction of a loan secured by home equity is that the cash acquired can be used for anything - a new car, college tuition, or a bagful of groceries. It is not limited to one purpose only, as most other loans.

A second mortgage can be practically of any type. Some are easier to shop for, some are harder to find, but it’s all in your hands, backed up with your credit score. The complication factor is that a second mortgage is literally second in the queue for refund in case you default on your mortgage payments. The lender of the second mortgage will not have a cent of his money back until the lender of the first mortgage gets all that’s his first. Sometimes it is all that there is and there is nothing, or way too little, left to pay back to the second lender. This unavoidable risk of a second mortgage usually makes it more expensive through a higher interest rate in the lender’s attempt to compensate for a potential financial loss.

The first lender may also take notice of your second mortgage activity and extend the period of your PMI payments on the first mortgage, if you had any.

A second mortgage imposes certain risks on the borrower, too. Read the rest of this article »