There is not a lot of difference between first and second mortgages except that one is normally taken out when a home is bought, and the other is taken out on the remaining balance of the first home loan.
The two most common uses that most people put a second mortgage to are home improvement and debt reduction. Both of these uses can make good economic sense if handled properly.
The only time it really makes sense to take out a second mortgage for home improvement is if the improvement is going to add to the value of the home. There are some projects that are considered more valuable in the eyes of homebuyers, such as extra bedrooms or a renovated ktchen, that will make them willing to pay more for the home.
Taking out a second mortgage to install an in ground pool may not be the best use for the funds, since a pool may not necessarily add to the value of a home.
Many credit advisors recommend using a second mortgage to those homeowners who are paying high interest rates on consumer debt. Typically, a homeowner would be interested in paying down consumer debt, such as credit card debt that may have interest rates of 16-20% with the proceeds from a second mortgage, which may have a rate of 5-9%.
But to take out a second mortgage that it not going to achieve either of these ends-add value to the home, or save money on consumer debt- is not a good choice.
If a homeowner defaults on his home, the first mortgage will be paid off from the proceeds of the home. The second mortgage is not paid unless there are funds still left after the first mortgage is settled.
Therefore, second mortgages will have a higher interest rate than first mortgages. The bank granting the second mortgage has a higher risk that the loan will not be paid, and increased risk is one of the most important factors in interest rates.
Second mortgages have closing expenses, so you should be careful about them and make sure that they do not render the second mortgage so expensive that it will not balance out the savings you envisioned.
It really pays to shop around for a second mortgage, since the rates can vary widely. You should also shop around for the lowest closing costs. Closing costs for a second mortgage are a proportionately greater expense since the loan is typically for a smaller amount than a first mortgage.
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