The difference between a first and second mortgage is straightforward. A first mortgage is taken out for the purchase of the residence, while a second mortgage is taken out on any residual value between the outstanding mortgage balance and the value of the home.
As a rule, a homeowner will get a second mortgage for home renovations, but there other reasons to do a second mortgage, and one of the most increasingly popular reasons is to pay down high interest credit cards.
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.
If a home renovation you are considering is really nothing more than a luxury, for example a pool, you probably won't get you money back on it.
Paying off high interest rate debt is probably a better use of lower rate second mortgages, since you will save a lot of money in the long run. If you are paying credit card rates of 10 to 20%, which are not uncommon, you will save a lot if your second mortgage is in the 5 to 9% area.
But be sure you use the loan for its intended reason, and don't "forget" to pay off those expensive consumer loans.
Unlike a first mortgage, a second mortgage will not have priority on your home if you default. The first mortgage on your home would be repaid by your home's value before any money goes toward the second mortgage.
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 determinants of interest rates.
There are closing costs with second mortgages just as there are with first mortgages. Make sure you are fully aware of all of the closing costs you will have to pay for loan, so that you can be sure the total cost of the loan balances the increased value of the home or the savings on the credit cards!
When it comes to second mortgages, you have to shop around, both for the best mortgage rates and for the lowest closing costs, which comprise a larger part of the loan in a second mortgage.
As a rule, a homeowner will get a second mortgage for home renovations, but there other reasons to do a second mortgage, and one of the most increasingly popular reasons is to pay down high interest credit cards.
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.
If a home renovation you are considering is really nothing more than a luxury, for example a pool, you probably won't get you money back on it.
Paying off high interest rate debt is probably a better use of lower rate second mortgages, since you will save a lot of money in the long run. If you are paying credit card rates of 10 to 20%, which are not uncommon, you will save a lot if your second mortgage is in the 5 to 9% area.
But be sure you use the loan for its intended reason, and don't "forget" to pay off those expensive consumer loans.
Unlike a first mortgage, a second mortgage will not have priority on your home if you default. The first mortgage on your home would be repaid by your home's value before any money goes toward the second mortgage.
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 determinants of interest rates.
There are closing costs with second mortgages just as there are with first mortgages. Make sure you are fully aware of all of the closing costs you will have to pay for loan, so that you can be sure the total cost of the loan balances the increased value of the home or the savings on the credit cards!
When it comes to second mortgages, you have to shop around, both for the best mortgage rates and for the lowest closing costs, which comprise a larger part of the loan in a second mortgage.
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