A loan that is secured against the same asset, by which the first mortgage is secured, is known as second mortgage. In second mortgage the loan amount changes as regard to the first mortgage paid and the current value of the property.
Along with a separate application process, underwriting and loan closing, second mortgages also require you to make separate payments each month in addition to your normal mortgage payments.
When a lender gives you a second mortgage, the lender takes a lien against your property, which is subordinate to your first mortgage. This means that if you later default on either of your mortgages and one of your lenders has to foreclose, the lender that issued your first mortgage gets paid before the issuer of the second. This structure makes second mortgages riskier for lenders, so rates typically are higher.
Reasons to Get a Second Mortgage
People get second mortgages for all types of reasons. Sometimes, they want to build an additional section or make other home improvements. Other times, they want to access the equity in their home to start or buy a business (second mortgages can be cheaper than business loans). Sometimes, they want to take a nice vacation or finance a large purchase like a luxury car or a boat.
Some of the most common reasons people get a second mortgage are:
- To make improvements to property
- To invest in a business
- To pay off higher-interest debt
- To finance a vacation
- Pay for a wedding
- Pay for large purchase like a boat