The world of personal finance is the world of a lot of complex vocabulary – I don’t know about you, but it seems like I have to be constantly looking up words just to understand the loan I’m taking out or the bill I’m trying to pay off.
One confusing pair of terms is “first mortgage” and “second mortgage.” What’s the difference between the two, and why would someone want to take out a second mortgage? If you’re not sure of what this home loan lingo means, take a look at the information below to get in the loop.
The first mortgage
Between the two terms, “first mortgage” is probably the easiest to understand: simply put, this is the loan you used to buy your home. You pay on this note every month, and at the end of the loan’s term, you’ll own your home outright. For many people, this is the only mortgage they’ll ever take out.
The second mortgage
On the surface, the definition of a “second mortgage” seems simple: this is a loan that’s taken out on a house that already has a mortgage on it. But when you drill down to what this really means, things get a little more complicated.
“Second mortgage” is another term for a home equity loan, which means that if you take one out, you’re borrowing on the value that’s in your home. You’re not using the loan to buy another home, but to put some extra money in your pocket. Many people use “second mortgages” to purchase cars or pay for their kids’ college tuition. But it’s important to remember that your house serves as collateral on both your first and second mortgages, so if you don’t pay either, you could be putting your home at risk.
Why do people take out second mortgages?
Many people are confused by the term “second mortgage” because they don’t understand why anyone would sign up to pay on another home loan – isn’t one enough?
But there are some good reasons to take out a second mortgage if you need some extra cash. For one, most second mortgages carry much lower interest rates than other types of loans. Also, in some cases, they’re easier to obtain than a personal loan because the bank has an asset to seize if you don’t pay the bill. These factors make second mortgages a smart choice to some borrowers.
As with most other financial terminology, “first mortgage” and “second mortgage” are easy to understand if you break down the terms down to their component parts –use the details above as a guide, and you’ll easily get the hang of talking the home loan talk!