The term “Second Mortgage” has a bad reputation. I remember when my parents applied for one about a decade ago, the negative reaction our friends and family had. I distinctly recall arguing with one particular friend about whether my family was doing okay financially or not, and being unable to come to a definite conclusion. We both had pretty good arguments, but neither argument seemed to disprove the other.

I certainly didn’t feel like my family was poor, but my friend insisted that no one who was doing well financially would opt for a second mortgage. Who was right?

It isn’t an altogether false generalization to say that the reasoning behind a second mortgages represent financial difficulty. In many cases, people do choose to refinance their homes because they are having trouble making monthly payments. However, there are situations where a person who is doing perfectly well with their finances might take out a second mortgage with the aim to build greater equity in their home. So which is it then? A good idea or a bad one?

In What Ways Are Second Mortgages A Bad Idea?

To start, 2nd mortgages always have higher interest rates tagged onto them. So though it may seem like you are getting a better deal and paying less per month, in the long run you end up paying a lot more than you would have with just the first mortgage alone. For some, this is reason enough to avoid them all together. I know my dad hated paying interest on anything, so I realize now that it must have been a tough decision for him to agree to those terms.

Another reason 2nd Mortgages are generally panned as bad ideas is due to fact that it adds another shade of risk to all the initial risks that came along with your 1st mortgage. When refinancing your home, you are putting up your property as collateral again, which means there is a whole new lien being etched into your home. Even if the 1st mortgage gets completely paid off, you won’t actually own the property until the 2nd and all of its accompanying interest is paid as well.

The general rule here is that you should not take out a 2nd mortgage if you can’t repay the debt. It sounds obvious, but think about it. It’s definitely a bad idea if you’re taking out loans to live a lifestyle you can’t afford. But there are circumstances where refinancing your home can be a good idea, and that’s the less commonly known knowledge.

Second Mortgages Can Be Effective And Beneficial

If well researched and used with discretion, you’ll find 2nd mortgages can be a good idea. The reason for the negative connotation the term “2nd Mortgage” carries is more due to the desperate motives that drive many people to file for one; halting foreclosures, extreme debt, avoiding bankruptcy. But when a person can fully pay back a loan and has a specific goal in mind, taking out a 2nd mortgage can be used as a tool for building equity or improving your finances.

For example, some people take out a 2nd mortgage to repair or make additions to their homes. While this could be considered a risky tactic, when done correctly it can substantially increase the equity in your home, and proves to be a worthy investment. You do have to be careful though, as making cheap additions or repairs can end up decreasing the value of your property.



Another good tactic is to use your 2nd mortgage to pay off any major debt you may have incurred. Often, the interest rates for a 2nd mortgage are much less than those of a credit card, and so the money you will save in interest ends up being worthwhile. However, this maneuver must be used with caution. It is rather tempting to keep using a credit card after it has been paid off, because it appears that your debt has been wiped clean. But in the case of using a 2nd mortgage, the debt isn’t gone; it’s just been transferred elsewhere. It’s a good idea to avoid the high interest, but if you stack more debt on top of it, you’ll end up deeper then you were when you started.

Is A Second Mortgage Right For Me?

Second Mortgages are beneficial to some people. In the case of my family, the loan helped us get through a rough patch. We were having financial difficulties, but the borrowed money was used in such a way that we were able to bounce back without any significant changes in our lifestyles. Consequently, my parents are still paying off their 2nd mortgage over 10 years later, when they perhaps would have been done with their first mortgage several years ago.

There’s more to know about 2nd mortgages. Are you familiar with Mortgage Pay-Off Insurance? What about the procedure for refinancing a scond mortgage?

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