What Is a Second Mortgage?

Many people have two mortgages on their homed. The first is the primary loan and is generally the one with the highest payment. The second mortgage holds the same rights to the property as the first mortgage, only they are subordinated to the first mortgage, so if the borrower goes into default, the first mortgage is paid off before the second mortgage.

Reasons for Getting a Second Mortgage

A second mortgage can be obtained for a number of reasons. It may be to consolidate outstanding debt such as car loans and credit cards, to make necessary home repairs, for education expenses, vacation time or just to have a buffer for impending hard times.

Purchasing a Home

Many potential homebuyers use a first and a second mortgage to purchase their homes. This helps them to avoid the necessity of paying private mortgage insurance (PMI). PMI is calculated into the house payment on homes where the borrowers have less than 20 percent down payment.

Requirements

In order to obtain a second mortgage, there is the application and credit approval process. In addition to that, the equity available in the home must be enough to cover the amount of the second mortgage.

Dilution of Equity

Second mortgages dilute the equity of the property but give the owner of the property money needed for other purposes without having to sell the property.

More Risk, Higher Interest

Because of the subordinated position, second mortgages are typically written at a higher interest rate than a first mortgage and also for a shorter term.

Legal Rights

A second mortgage can foreclose on a homeowner for nonpayment, even if the first mortgage is current. The second mortgage holder can purchase the primary mortgage to put themselves into a first position and to give more rights in a default.