Blog

Welcome to the BeSmartee blog. Enjoy a wide selection of articles related to mortgages, the industry, and real estate.

What is a Second Mortgage?

By Arvin Sahakian · Jul 3, 2015 · Mortgage

What is a Second Mortgage?

Image courtesy of Flickr, Simon Fraser University

A second mortgage can be an important financial tool in specific situations. However, it is important to understand exactly what it is so you can make sure you are using this tool wisely.

The concept of a second mortgage is intriguing, but a little scary. In some cases, it can be a beneficial way to get the cash you need to improve your home. In other cases it can be used to combine with a first mortgage in order to purchase a home. However, if you do not utilize it properly, it can be a quick way to get in over your head financially.

Learn more about this tool so you can decide if a second mortgage is a wise choice for your needs.

Definition of Second Mortgage

A second mortgage is a type of financing that is made on a property while the first/primary mortgage is still in place, or in combination with a first mortgage when purchasing a new property.

If a property is foreclosed on by a lender, the first mortgage will get paid off first and if there is anything left over, the second mortgage will get paid off next. Therefore the risk to the lender issuing a second mortgage is higher.

Second loans are riskier for lenders because in event of a default it is only paid off AFTER the first loan is paid off, so a second mortgage is usually for a significantly smaller amount and for a higher interest rate.

When Would a Second Mortgage be Necessary?

Since a second mortgage is usually for a smaller amount and a higher interest rate, why would a borrower choose to obtain a second mortgage?

There are actually two distinct times when such a loan is necessary-during the initial purchase OR during a refinance:

1. During a Purchase

One reason many people choose a second mortgage is because they cannot get a single loan for the amount they need to purchase a home. Sometimes getting a first mortgage and then a smaller, supplementary mortgage will help you to be able to purchase a home you could not otherwise qualify to buy. Another reason you might obtain this loan during purchase is if the house needs significant repairs or upgrades in excess of the purchase price.

2. During a Refinance

When you refinance a home, often a second mortgage is chosen to help you access equity in your home. This can allow you to take care of necessary repairs or pay off other higher interest rate loans, such as a business loan or personal loan.

Credit Requirements

Like any type of mortgage, the credit requirements of a second mortgage may vary from case to case. There are no certain credit score requirements to obtain a second mortgage. However, you will often find that getting your score above 600 and ideally 650 is what it takes to get lenders to approve you for a loan that won't have a higher interest rate than you may be comfortable paying.

Document Requirements

The document requirements of a second mortgage should be quite simple for you, assuming you already have the first mortgage. You will usually need the same type of documentation as a first mortgage. Most lenders will require that you prove ownership of the home and give some documentation about your income and ability to repay the loan.

Example of Second Mortgage Payment

The best way to see how a second mortgage will affect you personally is see how your payments will work. A simple example would be:

  • You apply to borrow 40,000 to redo your kitchen and basement
  • You qualify for a 5% interest rate and a 15-year repayment term
  • You will have a $316 monthly payment due each month for 15 years

Advantages of Second Mortgages

The main advantage of a second mortgage is that it allows you access to money you may not otherwise be able to obtain. If you are using the money to improve your home or pay off higher interest rate loans, it makes perfect sense to choose this type of financing and improve your overall financial picture.

Another advantage is that you do not need to refinance your first, primary mortgage if you are looking to cash out. Many people have a very low rate with a good term on their existing loan, so a second mortgage gives you the opportunity to tap into your equity without touching your first mortgage.

Disadvantages of Second Mortgages

The disadvantages of second mortgages occur when you borrow more than you are able to pay in the future and end up getting your finances into a difficult place. If your home loses value, a second mortgage could make it harder to get back to a comfortable place financially because you will not have the ability to refinance and consolidate your two mortgage together.

Additionally, there are closing costs associated with this type of loan, so you must be careful of the added expenses as well.

Don't Rush to Judgement

A second mortgage is a useful tool for some homeowners, but it isn't always the perfect solution. You should be aware of the credit and document requirements before you apply for a second loan. Also make sure you learn more about the process and costs involved before you dive in. You will be more likely to make a smart borrowing decision when you know exactly what you are getting into, so there is no reason to rush to judgment.


Real Estate Commission: Explained, Revealed and Compared
By Arvin Sahakian · Aug 17, 2015 · Real Estate Data

Real estate agents receive commissions from home buyers and sellers, collectively earning over $50 Billion per year. Learn how commission amounts are set, who pays them, and how they work in this article. Read more.

197,736

California Property Tax: Complete List by County 2014-2015
By Tim Nguyen · Nov 26, 2014 · Real Estate Data

List of secured property tax rates for all counties of California fiscal year for 2014-2015. Read more.

126,863

California Proposition 60 and 90: Your Complete Guide
By Tim Nguyen · Nov 28, 2014 · Real Estate Data

If you live in California and are over the age of 55 you can effectively reduce your property taxes when buying a new home. Read more.

66,402

What to Expect During the Home Loan Closing Process
By Arvin Sahakian · Feb 24, 2015 · Mortgage

You've heard the term used before, but what does loan closing mean? Find out all you need to know about the process. Read more.

54,310

The Surge in Foreign Real Estate Investment in the United States
By Laura Agadoni · Feb 24, 2016 · Real Estate

Foreign real estate investment in the United States, both commercial and residential, is a huge phenomenon that is only expected to accelerate, maybe even to skyrocket, in 2016. Read more.

50,343

Houston vs. Dallas: Which One is Better to Live in?
By Amanda Curry · Oct 11, 2016 · Real Estate

Houston Vs. Dallas? If you are considering moving to either of these major metropolitan areas, we've created a resource to help you make the decision process a little easier. Read more.

49,087

5 Illegal Borrowing Activities: Things That Are Illegal When You Try to Get a Home Loan
By Laura Agadoni · Jan 22, 2016 · Mortgage

Whenever there is money to be made or money to be spent, some unscrupulous folks will take advantage, trying to game the system or commit all-out fraud. Read more.

48,433

Does Homeowners Insurance Pay Off your Mortgage if the House is Burned Down?
By Amanda Curry · Feb 8, 2017 · Mortgage

In this article, we explore how homeowners insurance works and what happens in the event of a house fire. Read more.

25,809

16 Ways to Improve Your Debt-to-Income (DTI) Ratio
By Veronica Nguyen · Nov 29, 2014 · Mortgage

Your DTI is used by mortgage lenders to determine whether you qualify for a loan, and if so, for how much. Improve your DTI with these 16 tips. Read more.

25,338

5 Tips on Getting a Mortgage Loan after Bankruptcy
By Veronica Nguyen · Apr 15, 2015 · Mortgage

A bankruptcy will make it very difficult to attain a home loan. These 5 tips will help you re-establish your credit quickly in order to qualify for a home loan. Read more.

20,782