Why a Second Mortgage Loan is a Bad Idea

While it is possible to make a second mortgage loan work well for you, it is generally a bad idea, for two very compelling reasons.

First, a second mortgage loan is charged higher interest payments than a first mortgage loan. This is because the credit institution lending you the money is taking on additional risk. Think about it. You already have a mortgage loan outstanding and it is secured by your house. The credit institution gives you a second loan, and yet you use the same property as collateral. In case you default on your loan, this will mean that the credit institution will have paid you twice for your property very risky.

Second, a second mortgage loan not only adds risk on the part of the credit institution involved, it also increases your personal risk. Think of it this way. You have two loans and are making two payments each month. Both these loans are only secured by one property your house. If the time comes that you fail to make either one of your payments (or perhaps both), the credit institution reserves the right to foreclose on your property. Unless the rate you get for your second mortgage loan is considerable less than what you got for your first one, a second mortgage loan is a bad idea.

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