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2nd Mortgage – Second Mortgage: Advantages and Disadvantages

 

When going through the home loan process, you will have to sit at a table with a title officer and sign your closing documents in most cases.  During this process terms will be thrown out all over the place.  One such term may be 2nd mortgage, but what exactly is a 2nd mortgage and how does it work?  Let's go over what a 2nd mortgage actually is and why these types of loan programs exist.  

 

First, a 2nd mortgage is just that, a 2nd mortgage.  For example, if you have a home that is worth $300,000 dollars, you may have a first mortgage for $250,000 and a second mortgage for $50,000.  The most common situation in which a 2nd mortgage is obtained is when a person wants to pull equity out of a home to use for a remodel, or any other financial need.  A borrower simply goes through a mortgage refinancing process in which the house will be analyzed for the equity amount needed to create a 2nd mortgage.  Having a 2nd mortgage means that you will have two house payments, one payment for the first mortgage, and one payment for the 2nd.   

 

Now that we understand what a 2nd mortgage is, why exactly do these types of loan programs exist?  The biggest reason why a 2nd mortgage would be used is to liquidate the assets that someone own, and in this case that would be real estate.  2nd mortgages can work in many different ways.  For example, if a person is pulling equity out of the home, they can choose to get a 2nd mortgage that has a fixed rate.  When doing a mortgage refinance you can also get a 2nd mortgage with an adjustable rate, or that is treated like a line of credit just like a credit card.  This type of option is very convenient because it makes the equity available to use, but you don't have to use it if you don't want to.  With this type of set up, you only pay on what money you are using, which is a great option for someone that temporarily needs to free up some money in an asset. 

 

2nd Mortgage holders often take a much bigger risk than the 1st mortgage company, and as such charge higher rates.  This makes a 2nd mortgage a bad option for those that need a bad credit mortgage.  If you have great credit, the 2nd mortgage options available to you may be a viable way to free up some equity in your property.  

 

  10 Steps to Home Ownership:

Step 1: Are You Ready?

Step 2: Hire a Realtor

Step 3: Get Loan Pre-approval

Step 4: Search for Homes

Step 5: Choose a Home

Step 6: Obtain a mortgage

Step 7: Make an Offer

Step 8: Insure Your Home

Step 9: Close the Deal

Step 10: Avoid Foreclosure

 

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