2nd Mortgage Rates

Though, 2nd mortgages are fairly common, many people are dissuaded from taking one on account of the higher rates associated with them. While there are certainly situations where a 2nd mortgage is advantageous despite the higher rate, many borrowers are still dissuaded.

Despite usually being for smaller amounts of money than first mortgages, 2nd mortgages carry higher rates because of a higher rate of risk for the lender. Borrowers who take 2nd mortgages tend to be in a higher-risk group than those who do not.

Those borrowers who take 2nd mortgages to avoid mortgage insurance premiums do so because they don’t have enough cash to pay the large down payment required to avoid the mortgage insurance in the first place.

Similarly, those who are taking the 2nd mortgage to get cash from the equity built in their home are more likely to be in financial distress than the average borrower. Statistics support these observations, with default rates for 2nd mortgages higher than those for first mortgages. Also, if there are financial problems with the borrower, the lender on the 2nd mortgage will only be paid after the lender on the first mortgage. This introduces even greater risk into the 2nd mortgage calculation.

For this reason, a 2nd mortgage obtained at the same time as a first mortgage, to the same borrower, will have a higher rate, provided the mortgage is of the same type. However, some2nd mortgage types may have lower initial rates than first mortgages.

One example is an adjustable rate line of credit secured by the borrower’s home. This loan may have a lower rate because it carries a much higher risk for the borrower than many other 2nd mortgage types.