Second Mortgages and Home Purchases

A second mortgage is different from other types of secured loans because you are using your property which is currently not paid off to provide additional financing. If you own your home outright, then you are not obtaining a second mortgage; you are obtaining a home equity line of credit. Similarly, if you are looking for an additional mortgage to purchase another property, this is not a second mortgage. A second mortgage only occurs when you are putting more than one deed to your home on the market. A second mortgage is a very specific type of loan, and as such it comes with many unique advantages and disadvantages. 

A Second Mortgage Uses Your Home as Collateral

You will not simply be paying your mortgage plus another personal loan; you will be paying two mortgages, and if you default on either, you can lose your home. Essentially, you are placing the deed to your home in the hands of someone else until you repay them for the loan. Using a second mortgage to finance home repairs, while common, is very risky. Regardless of your record paying off your primary mortgage lender, the home can be taken away for default. Foreclosures remain on your record for 10 years in most states making them a significant black mark in your credit history.

A Second Mortgage is Subordinate

A subordinate loan is simply one that stands behind another in the list that will be repaid in case of bankruptcy, foreclosure, or other financial crisis. A second mortgage loan is almost always subordinate to the first. The only time it is not subordinate is if the lenders somehow agree to a different arrangement, which is highly unlikely. Many lenders do not want to be in the subordinate position. This means some lenders, specifically local banks, will not allow for second mortgage purchases. Other lenders specialize in second mortgages and subordinate loans. These lenders take on more risky investments, and you will pay more as a result of their risk taking. Subordinate loans come at a higher interest rate than first mortgages even if you have a solid financial history and good credit score. 

A Second Mortgage is Hard to Obtain

A second mortgage is not just expensive but very hard to obtain due to the risks involved for the lender. First of all, you will need sufficient equity in your home. This means your mortgage will have to be at least partially if not nearly wholly paid off. Next, you will need a very clean application. While there are many guidelines to a clean application, for these purposes the most important are: no bankruptcies, no late payments for at least 5 years and currently using less than 10% of your existing credit. Other criteria will be your income stability, if you have paid off other mortgages and the diversity of your loan portfolio. Even if you are perfect in all of these areas, expect speculation when you apply for a second mortgage. You will likely need to explain the purpose of the loan and negotiate aggressively for the best rate.