Second Mortgages - What Are Your Options?

A second mortgage (or home-equity loan) can be very useful when a homeowner wants to pay large bills, cover medical expenses, remodel a home, start a business, or raise capital for upcoming projects. 

A second mortgage is slightly different from refinancing, since the goal is to create liquidity rather than save money in the long run.

Because a second mortgage is usually a subordinate mortgage (meaning that the second lender doesn't receive full payment until the first lender has been taking care of), they tend to have higher interest rates due to the increased risk.

In other words, if a borrower can't afford to pay back the first mortgage, there's no way that the 2nd mortgage will be repaid.

2nd Mortgage Options

With fair credit, solid equity, and a regular income, securing a second mortgage usually isn't terribly difficult.  But homeowners should be cautioned about the risks involved with taking out a second mortgage. 

If there is a danger that a person might have trouble paying back a first or potential second mortgage, then a second mortgage should be avoided.  Refinancing the first mortgage is probably a better option. 

In addition, taking out a second mortgage should never be done for the sole purpose of extending a comfortable lifestyle. 

They should only be taken out to cover immediate expenses (medical bills, credit card debt, or student loans) or to make substantial improvements to existing assets (like home remodeling). 

Given the higher interest rates, a second mortgage can actually prevent a homeowner from achieving true financial independence.

As such, special consideration should always be taken before pursuing a second mortgage.

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