Second Mortgages

2007-03-08 10:33:40

( Financial )



Second Mortgage is a secured mortgage subordinate to another in the same property. In other words, second mortgages are mortgages that are applied after a first mortgages has been issued.

This occurrence is rare since mortgages are based on your ability to pay. Sometimes, lenders allow a third or fourth mortgage but are much rarer than the former. And this only happens in real estate property.

This type of mortgage is deemed to be subordinate because of the risk the lender is taking. If the first mortgage becomes 'default', the first has to be paid first before the second is financed. This usually charges higher rates too. And take note that this is most of the time fixed rate second mortgage. Second Mortgage rates may be applied fixed or adjustable.

Second mortgages are often confused with home equity loans. Home equity loans are usually structured as lines of credit while second mortgages are fixed dollar accounts.

You may be able to combine your first mortgage interest rates to your second mortgage interest rates. Blended rates are equal to the sum of all interest payments on both mortgages over a certain period, divided by the sum of all the balances of both mortgages over the same given period.

If the terms of both mortgages are the same, the blended rate will be equal to the weighted average rate.

However, it is possible that your 2nd mortgage rates will be lower than you first. This can only be possible when your 2nd mortgage has an adjustable rate. But this creates a greater risk for you.

It is also not advisable for you to use a second mortgage to pay off your first. This will be a 'gift' to the lender. Since, 2nd mortgage rates are higher than the first; you'll have to pay the higher interest rate instead. Plus, in this case, 2nd mortgages replace the first. So, as mentioned earlier, the rates you'll have to pay go higher than what you were supposed to pay.


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