Is a Second Mortgage Right for You?

By MortgageLoan.co

"Just the facts, ma'am," was Sgt. Joe Friday's famous line from the TV show Dragnet. And while the great detective character used the facts to solve crimes, you can use them to solve the problem of which mortgage to choose. So get ready-here's a "just the facts" overview of the ever-popular second mortgage.

Second mortgage facts

They always come in second: The second mortgage loan is called a "second" because it's a lien on your property that's placed behind your first mortgage. This order is crucial to your lenders. In the event that you default on your loan and your property is sold, the lender that holds the first mortgage is at the front of the line for the proceeds from the sale. Once that first mortgage has been satisfied-including all legal costs, costs of sale, etc.-the lender that holds the second mortgage receives whatever funds are left. As a result, a lender perceives the second mortgage to be a slightly riskier proposition, a fact which influences the next two items.

More risk, higher rates: Because of the higher risk, a lender adjusts its rate accordingly. Second mortgages generally carry higher rates, no matter how pristine your credit report may be. But despite this increase, the interest you'll pay on a second mortgage almost always trumps what you would pay on a credit card. Factor in tax-deductibility (there's a $100,000 limit on how much of the loan can be deducted), and this lending option remains a solid possibility for most borrowers.

Terms of varying lengths: Borrowers will find that second mortgage terms will be shorter, due to smaller loan amounts. These terms vary, with the most common length being 5-10 years. There are loans that are longer than that, as well as ones that are considerably shorter. When evaluating the choice that's right for you, be sure to calculate the amount of long-term interest you'll spend on loans with longer terms. The figures can be quite unsettling.

Interest vs. principal: Second mortgages vary in terms of how much money is paid toward principal on a loan. On a fixed-rate, fixed-term second mortgage (called a home equity loan), a set amount of money is designated for both interest and principal. On a home equity line of credit, the only set amount is a minimum interest payment. It's up to the borrower to determine how much he would like to direct toward interest and/or principal above and beyond that amount.

The facts helped Joe Friday bring plenty of wrongdoers to justice. Now that you're armed with the facts on a second mortgage, you should be able to detect the loan that's right for you.