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Sunday, November 09, 2014

Risk of a Second Mortgage

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A loan that in the event of foreclosure is paid off after the first mortgage.

You can have one or more mortgages on your property. Buyers often use second mortgages when they can not get enough financing from a lender to pay for a home. For example, you can ask the seller to reduce a home's selling price by $15,000 and offer to pay back this amount along with interest in monthly installments.

This $15,000 is secured with a second mortgage. The seller, though, is taking a risk - if you default on the first mortgage and the lender forecloses on the home, there might not be enough money from the sale to cover both the first mortgage and the seller's loan. Second mortgages usually have a higher interest to offset this risk. In some states, a second mortgage is called a junior trust deed.

Disadvantages in Taking a Second Mortgage

One disadvantage with second mortgages is the risk you are taking by using one. This is a serious risk to your home: if you cannot pay back the loan, the lender can potentially foreclose on your property and force you out. Make sure the intended use of funds is worth the risking your home by using a second mortgage.

Second disadvantage is that a second mortgage has slightly higher rates than a first mortgage, because the second mortgage won’t be paid until the first mortgage is, should you default. Because the loan is riskier than a standard mortgage, it costs you more even if the rate is lower than alternative sources like credit cards or unsecured personal loans.
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