Advantages of a 2nd Mortgage Loan

Anyone who has ever played the extremely popular board game Monopoly is at least somewhat familiar with the term 2nd mortgage loan. In real life, however; it can become a little more complicated to understand 2nd mortgage loans.

2nd mortgage loans are commonly confused with refinancing mortgage loans. These loan terms may sound similar, they are actually much different. When a homeowner refinances their home they are obtaining better terms for the loan that is already in existence. This may mean that they get a better interest rate on the new loan, lower their monthly payments, reduce the number of years left to pay on the mortgage or access the equity they have built in their home to purchase or pay for anything from a vacation to a college education. In almost all instances, refinancing involves financing the remaining principal amount of the original home mortgage loan. In some cases, the homeowner may do this with the same lender that originated the first loan but generally it occurs with a different lender.

A 2nd mortgage loan, however; involves the homeowner taking out another loan on the property. In this case the homeowner will still be responsible for the first mortgage loan and the mortgage payment connected to that loan. The most common reason homeowners choose to take out a 2nd mortgage on their house is to raise funds necessary to pay for education or medical expenses or to renovate the home. Other common reasons for obtaining a 2nd mortgage include the purchase of a car, to pay for a wedding or some type of unexpected circumstance.

Homeowners who are considering 2nd mortgage loans should also consider whether refinancing their existing mortgage would be more beneficial. In some cases this is true, in others it is not. Generally speaking, a 2nd mortgage loan will usually only be available at slightly higher interest rates than the first mortgage loan and refinancing. Lenders typically consider a 2nd mortgage loan to be a greater risk because the homeowner is taking on an additional mortgage payment and so to cover that risk, they charge a higher interest rate. Refinancing may instead make it possible for the homeowner to obtain a lower rate on their existing mortgage loan, instead.

Refinancing may not be more advantageous than a 2nd mortgage when the homeowner has not built up much equity into the home or when the market value of the home has not increased much beyond the original purchase price paid by the homeowner. In these scenarios there would not be a large source of additional funds above and beyond the principal amount owed on the first mortgage loan for the homeowner to access. If interest rates are higher than they were when the homeowner financed their mortgage, it also would not make good business sense for the homeowner to refinance a lower interest rate mortgage loan for a higher interest rate mortgage loan. In these cases, it would be more advantageous for the homeowner to proceed with the 2nd mortgage.