Second Mortgage
A second mortgage is a mortgage loan taken on top of an existing mortgage loan. In real estate, a second mortgage is generally subordinate to a first mortgage. That means the holder of the first mortgage has priority over the holder of the second mortgage in terms of getting paid or taking possession of the property in the event of foreclosure. This makes second mortgages more expensive than first mortgages.
The second mortgage loan holder runs a greater risk of never getting his or her money back. To get someone to take a greater risk you have to offer a greater reward. So the interest rate on a second home mortgage loan will tend to be higher than the interest rate on a first home mortgage loan. But it may not actually be higher.
If interest rates have fallen dramatically since you took out your first home mortgage loan, the going rate on a second home mortgage loan may actually be lower than your first mortgage rate. This is a very unusual circumstance, however. Generally, people refinance when interest rates fall, swapping one loan for a less expensive one and not carrying two mortgages at the same time. But occasionally, circumstances make a second mortgage a useful financial tool.
Usually, a home second mortgage involves dire circumstances. Someone needs a hideously expensive operation or they will die. Someone must be bailed out of jail (for something he didn’t do, of course). People do irrational things under dire circumstances, so bankers are very careful about making home second mortgage loans.
Generally, a bank will look at the current appraised market value of your home; determine how much equity you have in the home, or commercial venture; and then lend you no more than 75 percent of your equity. The bank will also want substantial evidence that you are able to repay the additional second mortgage loan on time according to its payment schedule. Home second mortgages are not that easy to get.
Second mortgage financing on a home makes no sense as an investment; a home rarely generates a return on investment large enough to justify the cost of a second mortgage. A commercial second mortgage may be a different story.
If you own a bed and breakfast, factory office building, or some other piece of income-producing property, a commercial second mortgage may be profitable. If the second mortgage costs 5 percent per year and what you plan to do with money lent will bring in 10 percent per year, then you earn a net return on the investment of 5 percent. You may use the loan to expand or modernize your factory; advertise the availability of office space more widely; or just about anything that increases the income the property generates. A bank will look closely at your plan for using the loan and base its decision as much on the estimated ROI as on the equity that you have in the property.
Second mortgages can be desirable to help you get what you want, just make sure you don't get in over your head, chancing losing everything if your venture fails. Calculated risks can be good, and a second mortgage can be valuable.