Second Mortgages

This article explains what 2nd mortgages really mean ...

When choosing to refinance your home, take into consideration why some lenders will consider their position to be less than favorable as lenders in the scenario. For starters, they are loaning you money and taking a second mortgage. In a foreclosure situation, this means they get their money after the first mortgage is paid in full. The fact that the lender is in second position is bad enough, but knowing that the first position will get their entire loan amount against the property first without a second glance at the second mortgage can leave a lender apprehensive about underwriting a second mortgage.

Second mortgages are sometimes the least favored position because the lender is already seeing that you are a likely candidate to eventually end up in foreclosure. Unless you are getting the second mortgage for home improvements or to buy another home, a second mortgage often means the person or couple is facing financial difficulties. What's to say that the second mortgage isn't just a quick fix and that the person won't experience further financial hardships a couple of months after the ink is dry on the 2nd mortgage contract paper?

Second mortgages, in most cases, are indicative of the person experiencing financial hardships. In most cases, the person is behind on payments and uses the second mortgage to catch up on outstanding loan obligations. Do they pay off those existing notes? Not always, which means that more debt has been added to the individual who couldn't pay their payments to begin with, making it much less appealing to a lender to lend money to that individual.

Second mortgages enable people to get some equity out of their house in a roundabout way. However, keep in mind that a lender who is going to loan money on a second mortgage will likely only loan a certain amount against the appraisal amount, and if the house isn't going to appraise for enough to carry the first mortgage against the house, then a second mortgage is probably out of the question.

Second mortgages put the lender in a second position right behind the lender in first position, so if the house goes into foreclosure, then the second lender holds its breath while the first lender is paid. If there is money left over, then the second lender is paid off but if not, then the lender goes home empty handed. When the empty handed lender returns to his or her bank, heads are likely to roll as people are left wondering why the lender loaned the money in the first place. This is why often banks require excellent credit and a lot more equity in the home than they would have wanted to see 30 years ago. 

Foreclosures can happen to the best of people and when people can't make their payments, foreclosure often becomes their reality. When you are placed in hard times, consider debt counseling and other alternatives to a second mortgage, because second mortgages are often only contributing to the problem and sometimes contribute to a much larger problem when the second mortgage payments can't be made any more easily than the first.

Unless lenders see the money from the second mortgage going toward home improvements or used for another investment, they will recognize the second mortgage for what it really is, which is often a desperate attempt to postpone a financial catastrophe. When this happens, many lenders will not want to loan money for a second position in any real estate transaction.

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