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When A Second Mortgage Is Good For You?

Most homeowners take out a mortgage when they purchase their home.  This mortgage is called a first mortgage.  Some have done mortgage refinancing and have changed their first mortgage to a lower interest rate to lower their monthly payments.  Many homeowners also have taken out some type of second mortgage on their home as well.  You may wonder if a second mortgage is good for you.   

There are many circumstances where a second mortgage may be taken out by homeowner.  Some people may be in need of cash to pay for high medical bills after an accident or serious illness.  Others may want to remodel or add on to their home and need the money to do so.  Generally, the loan interest rates for a second mortgage are lower than other types of loans, such as just a personal loan.  Thus, this type of loan is appealing to the homeowner.  There are a number of different types of second mortgage liens as well as mortgage refinance options that may fit well for you.  Getting a home equity loan may be a great option because the rates are low and you can get this type of loan on a revolving line of credit.  This way, you only pay interest on the amount of money you have pulled out to use. 

Just like with a first mortgage, a second mortgage will require paperwork.  An appraisal will need to be conducted by a certified appraiser that the lender chooses.  The title will need to be searched for your home by a title company.  There will likely be requirements for income verification, and closing costs will be incurred.  By understanding what your mortgage refinancing and second mortgage options are, you will be in a much better position to make an educated decision as to whether this will be good for you or not.   

The traditional second mortgage uses the equity in your house as collateral.  For instance, if your house is currently worth $250,000 and the balance on your first mortgage loan is $180,000, then you have $70,000 in equity.  Typically, if you borrower over 80% of the value of your home, you have to pay private mortgage insurance each month, which can add quite a bit to your monthly bills.  So, you could borrow $30,000 of that equity in the form of a second mortgage.  This mortgage is in addition to your first mortgage, and the interest rates will often be a little higher because the lender is taking a higher risk to become the 2nd lien holder on your home.  This loan may be an interest only loan or a fully amortized loan.  It is important that you look at how your payments will work. 

If your credit has gone bad and the only way for you to qualify for a mortgage refinance is to get a bad credit mortgage loan, it may still be worth your while if the interest rates are low and you can lower your payment.  Do some research and ask your lender any questions you may have as you determine whether a second mortgage is a good financial move for you.