How Does a Second Mortgage Differ from a First Mortgage?

Last week we covered the differences between second mortgages and home equity loans. We began that post by saying that a second mortgage is any mortgage taken out after, or in addition to, the original mortgage on the home. But aside from the fact that second mortgages are taken out in addition to the original mortgage, what are the differences between a first mortgage and a second mortgage?
One of the biggest differences between first and second mortgages is that second mortgages are usually set for a shorter amount of time. While you may have as many as 30, or even just 15, years on your first mortgage, your second mortgage could be for as much as half that. The lengthiest term you’re likely to get with a second mortgage is 15 years. This could mean higher monthly payments, but it also means less interest paid and of course, getting out of debt sooner.
Sometimes with second mortgages a balloon payment is required at the end of the loan. These balloon payments could be much larger than you expected and aren’t usually a requirement with first mortgages. It’s also important to know that while these balloon payments may be large, you usually have lower monthly payments for most of the life of loan because of that balloon payment you’re paying at the end.
Second mortgages are also riskier to the lender than first mortgages are. This is because the second mortgage is in addition to the first mortgage existing on the home. If the borrower cannot repay the first mortgage and is forced into foreclosure, the lender of the second mortgage will receive nothing. Because of this, second mortgages generally come with higher interest rates than you paid on your first mortgage. That being said, watching the rates and applying for a second mortgage when they’re low (such as they are now,) can still be a huge payoff in the end.
One of the biggest differences about second mortgages that has come about just recently isn’t a difference between first and second mortgages, but in how second mortgages are viewed. It used to be the old saying that you might need to “take out a second mortgage on the house,” when large expenses came up; it was looked at as a last resort and a route to take only when all else had failed. That perception has vastly, and rightly so, changed today. With interest rates low and an economy that’s glowing in comparison to others around the world, second mortgages are now far from a last resort. Instead, they can be a fantastic option when you need to consolidate other, higher-interest debt, or when it’s time to renovate your home and build equity in it – therefore, putting money right back into it.