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<h2>How Does a Second Mortgage Differ from a First Mortgage?</h2> <p> A second mortgage is basically a loan that you take against the equity that you have already built into your home. The proceeds from the second mortgage can generally be used for whatever purpose the borrower has in mind. It can be used to pay off a car loan or credit cards. The proceeds can be used for home improvement or to take a vacation. The money can even be put in a savings account for a rainy day fund.<br /><br />In the past, the total amount of debt from a first and second mortgage combined could not be more than 80% of the home's appraised value. Recently however, low interest rates and a hyper-competitive marketplace created a lending environment where some lenders were approving second mortgages that, when combined with the first mortgage balance, totaled as high as 125% of the home's appraised value.<br /><br />Most competent financial advisors will warn against carrying that much debt on your home. At Micott Mortgage, I never recommend borrowing more than 100% of your home's value and rarely would I recommend a second mortgage with a loan to value of greater than 90%.<br /><br />Because a second mortgage is a property lien that is placed behind the first mortgage, this means that in the event of a default, after the property is sold the first mortgage gets paid first, including any legal costs and other costs of the sale, before the second mortgage can be paid. If there is not enough money from the sale of the home, the second mortgage does not get paid.<br /><br />A Higher Interest Rate<br /><br />The interest rate that a lender is willing to loan money out at for a home mortgage is dependent on the risk level to him. For this reason that a high risk borrower with a poor credit history will always be charged a higher interest rate than a low risk borrower with a strong credit history.<br /><br />This theory also holds true for a second mortgage. Because a second mortgage lender is (by definition) second in position to be paid off in the event of a default, and because there is a greater chance that in default there may not be enough equity in the home to pay off the second mortgage in full, second mortgages are almost always given at a higher interest rate regardless of who the borrower is.<br /><br />2nd Mortgage Terms<br /><br />In general, the terms given for second mortgages are shorter than those for first mortgages - primarily because the dollar amount of the second is generally much lower than that of the first.<br /><br />Repayment terms for second mortgages can vary considerably, so it is important to look around for the one that is best for you. Mostly they range in length from 5 to 20 years, with the majority of the loans being 10 to 15 years. Some lenders may offer a 30 year amortization with a balloon (maturity date) of 15 years. This type of loan is referred to as 30 due in 15. Generally, the longer the maturity, the higher the interest rate. Conversley, the higher the credit score, the lower the interest rate.<br /><br />Second Mortgages Types<br /><br />Not only can the length of the second mortgage vary, so can other repayment terms. The majority of second mortgages, however, are paid back in equal monthly payments with a portion of the payment going to interest and a portion to the principal balance - just like a first mortgage.<br /><br />The two most common types of second mortgages are the fixed rate and HELOC (home equity line of credit). The fixed rate mortgage is a standard offering. The HELOC is a little unique and has been very popular. This loan type typically calls for interest only payments for the first 5 to 10 years and then the line of credit is frozen at the outstanding balance of the loan. At that point, the loan payments are recast and a standard principal and interest payment is established for the remaining 10 to 20 years. HELOC's are typically priced with a variable interest rate.<br /><br />HELOC interest rates are similar to other loan pricing; the lower the FICO score and the higher the loan to value, the higher the interest rate.<br /><br />When considering a second mortgage, do your homework and shop around to ensure that you get the best deal for you! <p style="margin-bottom: 0; margin-top:5pt"> <font face="Arial" style="font-size: 10pt">Article Source: <a href="http://www.ArticlesMaker.com">ArticlesMaker.com</a></font></p> <h3>About the Author</h3> Mike Cotter has been a professional lender for over 30 years. He began his career in the commercial banking industry in 1976 and in 1982 opened his own commercial bank and served as President and CEO for 10 years. He has been a successful <a href="http://micottmortgage.com" target="_blank">mortgage broker</a> for over 16 years and owns Micott Mortgage.

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