Second Mortgage

Get a second mortgage to access cash

If you have money tied up in your home equity and you need to access it, you can take out a second mortgage on your property. While a second mortgage loan is functionally identical to a home equity loan, there are some differences between the two that lie in the finer points of property law.

When a homeowner takes out a first mortgage, the mortgage serves as a "lien instrument," which means that the holder of this instrument (the bank) is first in line to gain ownership of the property if the deed holder defaults on enough payments to force foreclosure. Thus, a second mortgage serves as a second lien instrument, whereas a home equity loan is simply a debt that uses the first mortgage as collateral.

How Second Mortgages Work

Given that a second mortgage serves as a second lien instrument, the financial institution that holds gets second priority (behind the holder of the first mortgage) if you should ever go into foreclosure. This presents financial institutions with increased risk, which is why second mortgage rates tend to be higher than those for first mortgages, and also why they tend to come with more stringent conditions. If you need to get a bad credit second mortgage, you can expect even higher interest rates and even stricter terms and conditions.

Why Get a Second Mortgage?

There are certain situations in which you might want to get a second mortgage. First, if you need to access capital that's tied up in your first mortgage, you can recover some or most of your home equity when you take out a second mortgage. Use this money however you see fit -- on home renovations, to pay off other debts, or to invest in the hopes of generating a return that exceeds the interest you're paying on the second mortgage.

To get a second mortgage, talk to the bank where you have your first mortgage. You may be able to get more favorable terms and conditions if you work with the same lender, since this means that the bank won't have to compete against a rival in case multiple liens end up being placed on the property. Shop your rate around, though; alternative lenders may be willing to beat your bank's terms.