A second mortgage is a loan taken out against a home's equity. These loans are very attractive for several reasons. The process is relatively quick, and the easiest way to acquire money for home improvement, debt consolidation, etc. Homeowners with bad credit may take advantage of second mortgages as a means to improve their credit. Although a second mortgage will create an additional debt, the funds received can be used to payoff high interest credit cards and consumer debts.

How Does a 2nd Mortgage Work?

Second mortgages are not the same as refinancing a home. Refinancing creates a new mortgage. Moreover, homeowners must re-apply for the loan and pay closing costs. Second mortgages do not involve huge fees and funds are received with seven days. For example, if a property is valued at $150,000, and the amount owed to the mortgage company is $100,000, the difference between the property's value and mortgage amount is the equity. In this case, homeowners may obtain a second mortgage, or home equity loan for up to $50,000.

Should You Get a 2nd Mortgage?

Homeowners with bad credit may weight whether a second mortgage is a smart move. This creates an additional monthly expense. However, second mortgages are ideal for individuals hoping to improve their credit. While second mortgages carry a higher interest rate than first mortgages, the rates are considerably less than most credit cards and lines of credit. Moreover, second mortgages have shorter terms. When acquiring a second mortgage with the intent of consolidating debt, homeowners may become debt free in a few short years, as opposed to twenty or thirty years.

When Not to Get a 2nd Mortgage

Aside from consolidating debt, some acquire a home equity loan to pay for a child's education, dream vacation, buy a car, home repairs, etc. However, a second mortgage is discouraged if homeowners cannot afford an additional monthly expense. Individuals with a first and second mortgage are required to make two monthly payments. Payments apply to the original loan amount, and the balance of the second loan. Both loans are secured by the property. Defaulting on either a first or second mortgage may result in the lender foreclosing on the property.