Making the Decision a Second Mortgage

There is not a lot of difference between first and second mortgages except that one is usually taken out when a home is purchased, and the other is taken out on the remaining balance of the first home loan.

The two most common uses that most people put a second mortgage to are home improvement and debt reduction. Both of these uses can make good economic sense if handled properly.

The only time it really makes sense to take out a second mortgage for home improvement is if the improvement is going to add to the value of the home. There are some projects that are considered more valuable in the eyes of homebuyers, such as additional bedrooms or a remodeled ktchen, that will make them willing to pay more for the home.

If a home renovation you are considering is really nothing more than a luxury, for example a pool, you probably won't get you money back on it.

Today, it is considered a wise financial move to reduce or eliminate high consumer debt and replace it with lower rate debt taken from the increased value of the home. Typically, a homeowner would be interested in paying down consumer debt, such as credit card debt that may have interest rates of 16-20% with the proceeds from a second mortgage, which may have a rate of 5-9%.

But be careful to use the loan for its intended purpose, and don't "forget" to pay down those expensive credit card loans.

Second mortgages are exactly that in actuality as well as in name, because they are paid down after the first home loan is paid, and the lender has to hope there is equity to cover it.

This is the reason that rates on second mortgages are higher than on first. The bank that holds the second mortgage risks that the proceeds of the home in case of default will not be sufficient to cover the loan. Since risk is one of the most important determinants of rates, this higher risk increases the rate.

Just as with a first mortgage, a second mortgage will have closing costs. Make sure when you are making the decision about a second mortgage that you are well aware of all of the costs, so that you can make sure they are balanced by the increased value of your home, or the savings in consumer debt.

Rates on second mortgages can vary a great deal, so it really pays to shop around, not only for the base rate, but also for the lowest package of closing costs. Since the loan amount of a second mortgage is typically not as much as a first mortgage, small differences in rates and costs can have a proportionately higher effect on the cost of the loan.