Nowadays, almost everyone buys his or her home using a mortgage. Sometimes, though, life can be unexpected, and sometimes it can be just plain expensive! At times like these, it's frustrating to know that your house is worth so much more than you paid for it, and yet you can't just take that equity down to the local store to buy groceries - or can you?



Well, you probably wouldn't want to touch the equity of your home just for the groceries, but if you need to improve the house, start a business, pay off some expensive debts, or maybe put your kids through college, then a lump sum would be very handy. That's where a second mortgage may prove to be a good option.

Basically, when you buy a home and take out a mortgage, that's known as a first mortgage. That means that if you get into financial trouble, and the lender forecloses, they have "first" grab at the sale funds. If you then take out a second mortgage against the house, usually against the equity you've built up over time, then that lender will get "second" grab at the sale funds.

Because the lender who gives you the second mortgage is second in line, the risk to them is much higher. If the property is sold under foreclosure, and doesn't fetch the expected price, then it's the second mortgage lender who's going to miss out - well, at least until they start chasing you personally, anyway. But all that means they're opening themselves up to a bigger risk of losing money, or having a lot of hassle getting their money back.

So second mortgages are almost inevitably more expensive that first mortgages - both in terms of interest rates, and the fees charged. Quite often, too, a second mortgage has to be paid off in a shorter time frame. Your first mortgage might be for 30 years, but the second mortgage might only be for 10 years, as an example.

Apart from that, second mortgages come in almost as many different variations and have as many options as first mortgages. You can get fixed rates, adjustable rates, interest only, balloon payments - and the list goes on. So before you start trying to source a second mortgage, it's a good idea to have a very clear idea of what exactly you're looking for, and what you can afford to pay. If you're not in a position to make high payments every month, then you might be able to source a second mortgage with lower payments and a balloon payment after 5 years. Hopefully by then (particularly if you're doing home improvements) your house will be worth more, and you may be able to refinance both mortgages into just one, lower rate first mortgage.

There are a couple of different ways to set up a second mortgage, although technically they're not all called second mortgages! Basically, what we're talking about here is ways to access the equity you've gained in your home. So there's a standard second mortgage, which means you have two loans against your home. Remember, though, that even the combined loans probably won't be able to go above eighty percent of the value of the home.

You can also organise a home equity loan. This is mostly the same as a second mortgage, but is generally cheaper, both in interest rates and charges. Generally these are offered with adjustable rates, and quite often are taken out with the same lender as the first mortgage.

A variation of this is the home equity line of credit. This is where the loan funds are set up like a big bank account, and you can take out amounts periodically when you need them - for example, when the college fees are due.

All types of second mortgage will generally require an application, a credit check and a home appraisal. The criteria are often stricter than for a standard home loan, simply because the risk to the lender is higher. Even so, it's unlikely you'll be able to borrow more than eighty percent of the appraised value of the home.

In the end, only you can decide whether a second mortgage is a good idea for you. It can be enticing to suddenly have a windfall of a large lump of money, particularly when things are tight, but in the end it's no different to any time of credit - at some point, you are going to have to pay it back. So think very hard about your financial situation and your ability to make repayments when considering a second mortgage.