Using a 2nd Mortgage to Pay a First

Generally speaking, 2nd mortgages are designed to be used in connection with another mortgage, generally referred to as a first mortgage. The 2nd mortgage may be obtained when the home is purchased to avoid mortgage insurance or a jumbo loan. Conversely, borrowers may take out a 2nd mortgage to get extra cash for paying off other debt or to help with other expenses.

Another, less common use for a 2nd mortgage is to use the proceeds from a 2nd mortgage to pay off the original mortgage on your property. However, this use for a 2nd mortgage is rare for a reason. Generally, 2nd mortgages are priced higher than first mortgages. This is true for a variety of reasons, but primarily because the 2nd mortgage will only be paid after the first if the borrower defaults. This increases the risk to the lender involved with a 2nd mortgage.

Because 2nd mortgages are higher, using them to pay off a first mortgage is essentially a gift to the lender. Because the proceeds for the 2nd mortgage will pay off the first, essentially, the 2nd will take the place of the first. After this happens, you will be stuck paying a high 2nd mortgage rate on a first mortgage.

A better option is generally to simply refinance your first mortgage into another fixed rate mortgage at a lower rate. Many borrowers can refinance their mortgages and receive a significantly lower rate, rather than relying on a 2nd mortgage to do the job. However, there is one circumstance where getting a 2nd mortgage to pay the first could make sense.

If you have a low balance on your current mortgage and are considering an adjustable rate 2nd mortgage at a prime rate, you might save by going through with the transaction. You will be able to pay off the adjustable rate 2nd mortgage long before the rate shifts upward. In this case, you save money every month until the loan is repaid.