A second mortgage is a loan that is subordinate to another loan taken against the same property. They are called subordinate in the sense that if the loan is defaulted, the first loan gets paid off first before the second one. In such cases of default, any remaining money will be used to pay off the second mortgage after clearing the first.
The second mortgages are therefore riskier for the lender. Thus, second mortgage loans have a higher interest rate. They also carry closing costs and points that make them more expensive.
There are different types of second mortgages. In the most common type, the borrower takes loan for only the actual equity. For example, if a property is valued for $75,000 and if the owner has availed a first mortgage for $50,000, it is easy to secure a second mortgage for $25,000.
A line-of-credit second mortgage is another type in which the borrower applies for a loan but does not avail himself of it immediately. He can draw the money whenever he needs it.
Sometimes a second mortgage is taken at the same time the borrower secures the first mortgage. For example if the borrower wants to obtain a loan that demands a forty percent down payment and he has only thirty percent, he can apply for a mortgage for the required ten percent.
A second mortgage loan can also be applied for a value that is more than that of the borrower’s property. But these types of loans are riskier for the financiers and demand greater credit. Moreover, the interest may not be fully tax deductible.
A second-mortgage loan is a good option if you need money urgently. Refinancing the first loan could also be a better option, but it depends on your case. But beware of the transaction costs when you decide between a second mortgage and a refinancing option.