- Second mortgages are riskier for lenders, given that the first or primary mortgage lender is paid first if you should default on your mortgage loan, with subsequent foreclosure action. Second mortgage lenders are less likely to be repaid if your property is foreclosed on, or if you file for bankruptcy protection, whether your second mortgage lender is the same lender that holds your first mortgage or a different lender. Common reasons for obtaining a second mortgage include paying off high-interest credit cards and other unsecured debts, home renovation projects and educational or medical expenses.
- You need to shop around to discover the average interest rates for a second mortgage before deciding on a lender, just as you did with your first mortgage. As with a primary mortgage loan, the interest rate on a fixed-rate second mortgage loan stays the same for the life of the loan. It is advisable to use a second mortgage calculator when shopping for a loan, to ensure you can afford the additional monthly mortgage payments. Websites like HSH.com and Mortgage101.com offer listings of current mortgage rates and mortgage calculators. Similar to a first mortgage, you can secure a better interest rate if your credit score is average or better -- 720 or above.
- Second mortgages also come as adjustable-rate mortgages, which means the interest rate changes at regular, predetermined intervals. When considering an ARM for a second mortgage, it is advisable to clarify all terms of the loan. Find out when the lender will adjust the interest rate on the loan and if there are limits on how many times the rate can be changed and the amount of interest that can be charged. Typically, with an ARM, the interest rate starts off exceptionally low and rises over time, sometimes annually until the interest rate limit is reached. Make sure you can still afford your future mortgage payments once the highest interest rate is in place.
- It is helpful to determine how much of an additional monthly payment you can afford to make before you begin shopping around. Get an interest rate quote from a minimum of three lenders, including your current primary mortgage lender, and consult with websites similar to Mortgage101.com and HSH.com, to establish the average interest rates for a second mortgage in your particular area. Interest rates vary by lender and by location as well. Compare interest rates among your second mortgage options -- home equity loan, HELOC or second mortgage -- as rates may vary slightly for each mortgage product.
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