There is not a great deal of difference between first and second mortgages except that one is normally taken out when a home is purchased, and the second is taken out on the remaining balance of the first home loan.
Usually, homeowners will take out a second mortgage to perform some renovations or improvements to the property, but increasingly, people are using the equity in their homes to reduce or eliminate their high rate credit card debt.
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 additional bedrooms or a renovated ktchen, that will make them willing to pay more for the home.
Certain luxury home improvements, such as an in ground pool, may not be as attractive to potential buyers, and would therefore not be considered a good reason for a second mortgage.
Paying off high interest rate debt is probably a better use of lower rate second mortgages, since you will save a lot of money over time. Replacing 16 to 20% debt on your credit cards with 5-9% debt on a second mortgage really does make a lot of sense.
Creating more debt that is not going to either add value to your home, or reduce your present high interest debt is not a good economic decision.
Since a first mortgage is paid off from the proceeds of the home in case of default, there may not be sufficient equity in the home to pay the second mortgage, and this is the risk the second mortgage lender takes.
This is the reason that rates on second mortgages are higher than on first. The bank holding the second mortgage risks that the proceeds of the home in case of default will not be enough to cover the loan. Since risk is one of the most important determinants of rates, this higher risk raises the rate.
There are closing fees associated with all mortgages, but the closing fees for second mortgages are typically higher than for first mortgages. Be aware of all of the costs so that you can compare it to the benefit you plan to receive (the amount of increased home value, or the savings on credit card debt.)
It really pays to shop around for a second mortgage, since the rates can vary widely. You should also shop around for the lowest closing costs. Closing costs for a second mortgage are a proportionately greater cost since the loan is typically for a smaller amount than a first mortgage. - 29969
Usually, homeowners will take out a second mortgage to perform some renovations or improvements to the property, but increasingly, people are using the equity in their homes to reduce or eliminate their high rate credit card debt.
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 additional bedrooms or a renovated ktchen, that will make them willing to pay more for the home.
Certain luxury home improvements, such as an in ground pool, may not be as attractive to potential buyers, and would therefore not be considered a good reason for a second mortgage.
Paying off high interest rate debt is probably a better use of lower rate second mortgages, since you will save a lot of money over time. Replacing 16 to 20% debt on your credit cards with 5-9% debt on a second mortgage really does make a lot of sense.
Creating more debt that is not going to either add value to your home, or reduce your present high interest debt is not a good economic decision.
Since a first mortgage is paid off from the proceeds of the home in case of default, there may not be sufficient equity in the home to pay the second mortgage, and this is the risk the second mortgage lender takes.
This is the reason that rates on second mortgages are higher than on first. The bank holding the second mortgage risks that the proceeds of the home in case of default will not be enough to cover the loan. Since risk is one of the most important determinants of rates, this higher risk raises the rate.
There are closing fees associated with all mortgages, but the closing fees for second mortgages are typically higher than for first mortgages. Be aware of all of the costs so that you can compare it to the benefit you plan to receive (the amount of increased home value, or the savings on credit card debt.)
It really pays to shop around for a second mortgage, since the rates can vary widely. You should also shop around for the lowest closing costs. Closing costs for a second mortgage are a proportionately greater cost since the loan is typically for a smaller amount than a first mortgage. - 29969
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