Wednesday, May 7, 2014

2nd Mortgages – Second Mortgage Interest Rates and Refinancing 2nd Mortgages

A second mortgage (2nd mortgage) is a loan taken against your home in addition to the primary mortgage. The equity in your home is used as the collateral for the loan in the second mortgage. Second mortgages are often called subordinate loans because they come 2nd to a primary loan, meaning that if a borrower defaults on the loans, the primary loan is to be paid off prior to the balance second mortgage loan. It is for this reason that second mortgages (subordinate loans) are considered riskier for lenders, and therefore typically come with a higher interest rate.

When is a 2nd mortgage right for you?
There could be any number of reasons why a person would consider taking out a second mortgage. If you have a large amount of other high interest debt, such as credit card debt, it may make sense to take out a second home mortgage to payoff this debt. You may want to use the second mortgage to make an investment, whether it be in the stock market or a vacation property. You may just want to live above your means and buy a boat. The use of the second mortgage will in the end, be up to you. When I bought my first condo, I took out a second mortgage loan in order to avoid paying PMI (private mortgage insurance).

Interest Rates for Second Mortgages
As mentioned above, the interest rate on a second mortgage will typically be higher than the interest rate of a primary loan due to the fact that a default, the first loan is paid of prior to the 2nd. The interest rate will also be determined by the amount of the loan – the larger the percentage of home equity that you are borrowing against, the higher you can expect the interest rate to be.

Before applying for a second mortgage, make sure you talk to your broker and understand all of the details of the loan. Remember that no matter what the amount of the 2nd mortgage is, even if it is only a fraction of your primary mortgage, if you default on the 2nd mortgage, you could lose your home. Be sure to do your research and have a solid knowledge of your budget prior to securing a second mortgage.

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