What Is A Second Mortgage Loan?

What is a second mortgage loan? A second mortgage loan is actually a second lien on the home, and there are many benefits of carrying a second mortgage on your property. "A second mortgage loan is an actual...

"A second mortgage loan is an actual separate lien on a property," says Stephen Edwards of Waterfield Financial Company, the nation's largest privately owned mortgage company. He further clarifies, "The first mortgage is the first lien. It is put first into position. If there were any foreclosure proceedings to happen, the entire money foreclosure sale will go toward that first mortgage."


Edwards says, "The second mortgage is just like the second lien on the property."



A second mortgage is acquired for a variety of reasons. "It is used a lot of times for debt consolidation, cash out for personal use, and cash out for investment," he continues.

Individuals who have acquired a large amount of debt with various agencies, such as credit card companies, car dealerships, and contractors, might decide to consolidate their debt with a second mortgage, making the cash available to pay off their initial creditors. Additionally, people might secure a second mortgage for personal reasons, such as a second honeymoon, college expenses, medical costs, or home improvements.

In some instances, second mortgages are acquired for investment purposes. Edwards says, "If somebody can get a mortgage for 6%, they have a unique investment opportunity that can return 8%. It is moderate to pay the 6% interest on the second mortgage to get 8% back on an investment." In the long run, the borrower has made a profit from his initial expenditure, the second mortgage.

Another reason to acquire a second mortgage, says Edwards, is to avoid mortgage insurance. Furthermore, he states, "When a buyer buys the house, they can immediately have a first and second mortgage." Edwards reiterates, "The reason for this [acquiring a second mortgage] is to avoid mortgage insurance."

Edwards clarifies, "Let's say you have a home you want to buy, and you can put 5% down. Well any down payment under 20% requires mortgage insurance. You only have 5% to put down and you do not want to pay mortgage insurance. You may be able to get a 15% second mortgage. The advantage to that scenario is to avoid mortgage insurance."

Since the purchase of a home is an expensive venture, trimming costs, anywhere possible, is desirable. Avoiding the additional cost of mortgage insurance through the acquisition of a second mortgage is a step in the right direction. First of all, Edwards says, "Mortgage insurance can be pretty hefty."

He clarifies that this is because "the credit situation of a lot of borrowers plays into the amount of mortgage insurance that is required. Secondly, mortgage insurance is not tax deductible." Basically, the borrower is spending money on mortgage insurance each month, and he cannot itemize this amount on his taxes.

"There is another tax benefit to the borrower by having a second mortgage," states Edwards. "If you are paying first and second mortgage, your second mortgage interest is tax deductible." Therefore, even though you are spending an additional amount each month, you are able to take the tax deduction on it. Second mortgages are versatile in nature, as well as beneficial.

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