What it is:
How it works/Example:
Second mortgages are similar in concept to traditional mortgages. For example, second mortgages generally must be repaid over a fixed period. Some lenders may fixed rates on these loans; others might variable rates.
Like first mortgages, most banks also charge points and other fees for generating the second mortgage (attorney fees, title fees, insurance and documentation fees, for example), and these costs vary by bank. In some cases, the might charge a fee if the borrower prepays the loan. And because the loan is secured by a house, if the borrower defaults, the lender may foreclose on the house.
Why it matters:
Second mortgages can be viable options when compared to credit cards or other high-interest, unsecured loans. In addition, interest is tax-deductible, making the interest rates on second mortgages sometimes lower than they appear when one considers the tax savings.
However, not all second mortgages are created equally. Borrowers are well served to compare fees, interest rates, and repayment terms among . After all, when a borrower defaults, his or her home could very well end up belonging to the bank for good.