A second mortgage is a second loan that is secured against your property. Taking out a second mortgage is different from refinancing your home. Refinancing means that you have replaced your primary mortgage with a different primary mortgage. A second mortgage is a second, separate obligation that uses your home as collateral. You are still obligated to pay off both mortgages. The term second means that, should you default on your loan, your first mortgage would have priority and would be paid before any funds go toward the second mortgage.
A second mortgage can serve many purposes, but often it is used by homeowners who need to access the equity in their home to finance a major project, such as making a home improvement, consolidating debt, or funding a childs education. You may also use a second mortgage to avoid having to pay Private Mortgage Insurance (PMI), create a line of credit against your home equity, or purchase additional properties.
A fixed rate second mortgage is simply a second mortgage that is granted at a fixed interest rate. Keep in mind that second mortgages tend to have slightly higher interest rates than primary mortgages, mainly because these loans are considered a higher risk than a primary mortgage. There may also be associated closing fees with acquiring a second mortgage.
The main disadvantage of a second mortgage is that if you are unable to pay the loan back, you risk losing your house. While it may be tempting to tap your home equity as a source of funds for various purchases, it is considered advisable to use this power judiciously. Even if your primary mortgage is in good standing, unpaid payments on the second mortgage can trigger a foreclosure. In that case, the bank that issued the second mortgage can purchase the first mortgage, and take over the property. For this reason, a fixed rate second mortgage may be the safest because it offers predictable and consistent payments from month to month. Search around for the best fixed rate second mortgages.
