A second mortgage, as the name itself suggests, is a second secured loan or mortgage taken out on the same property. In the real estate business, a property can have multiple liens or loans against it and it would be possible to obtain third and even a fourth mortgage on a single piece of property. However third and fourth mortgages are rare compared to second mortgages which are common.

• Second mortgages are also referred to as subordinate loans since in case of a default the proceeds from the foreclosure would first be allocated to the first mortgage. In fact second mortgages are very similar to home equity loans (HEL) in which the equity of the property is used as collateral. The only difference being that a mortgage refers to a legal lien instrument rather than a debt (like HEL).
• A second mortgage can prove damaging in case of a foreclosure since the first mortgage can be bought by the second lien holder and then foreclosure occurs. This means that the home is as sure as gone in case of a second mortgage in case of a foreclosure. Therefore other options such as refinancing instead of a second mortgage can be considered before opting for the same.
• In second mortgages the interest rate is usually higher since the risk to the lender is greater. This is because the property already has a lien against it which automatically increases the risk since the mortgagor is already in debt. The term of the second mortgage varies and terms can last up to 30 years. However the repayment may be required within a stipulated period of time as mentioned in the terms and conditions.
• A second mortgage can only be beneficial to people who have a solid employment history, an excellent credit score, significant equity in the first mortgage, and a low debt-income ratio. If all these criteria are met then a person can take the risk of a second mortgage. In such cases the risk to the second lien holder also decreases as the above mentioned factors imply a lesser amount of risk.
• The amount of equity in the first mortgage plays an important role in determining the feasibility of the contract. For instance, if a person owes $50,000 out of the total amount of $100,000 then the equity would be $50,000. The higher the amount of equity, the lesser is the amount of risk faced by all the parties involved. Low debt to income ratio and good credit score are always useful in any line of credit and second mortgages are no different.
• However, the bottom line is that refinancing or taking out a home equity loan are better options compared to second mortgages. This is because firstly, the second lien holder has a greater amount of power in case of default and secondly it requires excellent financial health in order to even qualify for a second mortgage.

If you have any additional facts or points, please feel free to leave a comment.