Second mortgages are basically any type of home loan that you take out while still making payment on the primary mortgage. This is not an arrangement to be entered lightly because you will end up paying a lot of fees and can rack up a huge debt that negates some of the progress you have made in paying off your original mortgage.
Keep loan below Fannie Mae guidelines
One of the most common reasons to get a second mortgage is to keep your home loan amount below the Fannie Mae guidelines. Fannie Mae purchase home loans from lenders all over the country, but only if the loans are in accordance with some very strict rules.
If a lender wants to make sure that your loan does not go over the Fannie Mae limits, they can give you a primary loan for one amount and add a second mortgage for the remaining balance. It’s creative, and there are many alternatives to this arrangement, but it works.
Home equity loans
Another way to get a second mortgage is when you sign up for a home equity loan. The loan is basically secured by the amount of equity you have earned in your home. However, if you do the math, you are reducing your equity.
It’s an exchange. You are exchanging all that hard earned equity for access to cash. If a homeowner is not careful about getting a second mortgage he or she can end up with a very large debt, no equity and a big house payment.
In addition, a second mortgage can lead to an extension on the life of your loan. If you don’t have the cash to come up with a huge monthly payment, the terms on your second loan can extend a 30-year mortgage (your first mortgage) into a 45-year mortgage (with the additional fifteen years to pay off the second loan).
So what are some good reasons for a second loan?
Debt seems to be the primary reason homeowners go into this type of arrangement. Credit card, student loan, automobile and personal debt can all be wiped out and then financed at a much lower interest rate.
Basically a second mortgage is a quick way to convert some of your equity to cash so you can pay off some of your other high interest debt. If used wisely, it can be a powerful debt management tool.
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