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First mortgages are obtained out when a home is first purchased, while second mortgages are taken out some time later, when the equity in the house has grown. Therefore, the purpose of the second mortgage is not to finance the purchase of the home.

As a rule, a homeowner will take out a second mortgage for home improvements, but there other reasons to take out a second mortgage, and one of the most increasingly popular ones is to pay down high interest debt.

The only time it really makes sense to take out a second mortgage for home improvement is if the improvement is going to add to the value of the home. There are some projects that are considered more valuable in the eyes of homebuyers, such as extra bedrooms or a remodeled ktchen, that will make them willing to pay more for the home.

If a home improvement you are considering is really nothing more than a luxury, for example a pool, you probably won’t get you money back on it.

Paying off high interest rate debt is probably a better use of lower rate second mortgages, since you will save a lot of money over time. Typically the interest rate on credit cards can be 16 to 20% or more, while a second mortgage can be obtained at 5-9%, representing a significant overall savings to the homeowner.

But be careful to use the loan for its intended reason, and don’t “forget” to pay off those expensive consumer loans.

Second mortgages are exactly that in actuality as well as in name, because they are paid down after the first home loan is paid, and the bank has to hope there is equity to cover it.

This is the reason that rates on second mortgages are higher than on first. The bank holding the second mortgage risks that the proceeds of the home in case of default will not be enough to cover the loan. Since risk is one of the most important determinants of rates, this higher risk raises the rate.

There are closing fees associated with all mortgages, but the closing fees for second mortgages tend to be higher than for first mortgages. Be conscience of all of the costs so that you can compare it to the benefit you plan to receive (the amount of increased home value, or the savings on credit card debt.)

It really pays to shop around for a second mortgage, since the rates can vary a great deal. You should also shop around for the lowest closing costs. Closing costs for a second mortgage are a proportionately greater cost since the loan is typically for a smaller amount than a first mortgage.