There are instances when you have already borrowed money from the bank or non-banking financial institutions against your home and feel the need for more money after sometime. What do you do then? You might think that the bank or non-banking financial institution will not approve your loan because of the existing loan. However, this is not the case. Second mortgage loans allow you to secure a loan against your home even above the existing loan.

Let’s see how it works. Second mortgage is simply another loan taken against your home. However, the term second signifies that, in case you default, the second loan providers do not have priority over your home. Your first loan providers hold the priority and will be compensated first. Only after your first loan has been repaid, will funds be shifted to the second loan.

But why would you need a second loan? There might be various reasons. A few of them are:

• You may have acquired a huge debt by shopping a lot through your credit cards, or by taking an auto loan. The debt may also have come from the massive medical bills if one of your family members was hospitalized.

• You may have noticed a great business opportunity knocking on your door and need money to invest in the same.

• You do not want to shell out money for the private mortgage insurance. For this you need to make sure that the second loan is greater than 20 percent of the purchase price of your property.

Second mortgage permits you to borrow money based on the home equity, which is the difference between the current appraised value of your home and the amount paid towards your first mortgage. Lenders can provide you a second loan amount from anywhere between 85–125 percent of the appraised value of your home. However, the interest rate on second mortgages is higher than the first. This is because of the priority of the first loan over your home in case you default.

Second mortgages are usually pretty alluring because of the huge amount of money that you can get even though you have an existing loan. However, be very sure that you will be in a position to repay both the loans because in case you cannot, the consequences can be disastrous. Therefore, make sure you have the risks evaluated before considering for the second loan. You also need to pay a large amount of money accumulated towards the fees and other services involved in getting the second mortgage loan sanctioned. So you need to figure out whether the amount of money paid towards these fees and services is worth your second loan. If not, it is suggested that you do not go ahead for the second loan.

Loans are always taken when we are in dire need of money. However, a smart borrower often calculates the risks involved in taking the loan and makes sure he/she is always the one who gets to profit in the long run.