Whether or not you consider taking out a second mortgage is a good idea will solely depend on your financial situation.
If you do qualify, there are several benefits like home improvements, debt consolidation and much more. If you are still unsure, this article will help you decide if getting a second mortgage is a sound financial decision.
What is a second mortgage?
A second mortgage is a type of loan that the borrower takes out on a property in addition to the primary mortgage on the house. The interest on a second mortgage is usually more expensive than the primary one, as it is riskier to the lender. Another reason is; that the second mortgage rates are higher and the primary mortgage must be paid out first to avoid the borrower potentially defaulting on it
What is the purpose of applying for a second mortgage?
A second mortgage is taken out to increase the value of your house. You can maintain the built-up equity in your home by utilizing the money from the second mortgage to increase its value. Furthermore, the interest on a second mortgage can be deductible from tax if it is used to purchase, build or improve the property, as you decided to get the loan for that reason in the first place.
However, it is imperative to be wary when taking out a second mortgage to buy a vehicle or to pay for your family holiday etc. It is because the equity of your house is one of the most significant assets you have. It is a sound financial practice to consider spending it on those kinds of expenditures.
Additionally, the interest rate charged on second mortgages is likely going to be higher than your first mortgage, because the lender takes the second position on the property’s title. In the event the borrower defaults and your house is sold, the first lender will get paid first. This is the sole reason the second mortgage lender charges a higher premium because they take on additional risk.
Why should you get a second mortgage?
If you are considering how to utilize the funds from your second mortgage, the best option is to put it somewhere that will improve your net worth in the long run. This is because, you will eventually need to repay them, and also they are expensive. Below mentioned are a few ways to use a second mortgage:
1. Property renovations
Home improvements are a common way to utilize the funds of a second mortgage. It is because of the notion that you will eventually repay the loan when you sell it back with a higher sales price.
2. To avoid private mortgage insurance
Taking out a second mortgage can help you avoid private mortgage insurance. For example, a piggyback loan uses a second mortgage to keep the loan-to-value ratio of your primary mortgage well below 80%. Ensure it makes financial sense then cancel on private mortgage insurance.
3. Debt consolidation
Sometimes, you can secure a lower rate with a second mortgage. However, you might end up switching from an unsecured loan to a secured loan that could potentially cost your home.
Although expensive, second mortgages can still be cheaper than other consumer credit products such as credit cards, auto loans, and even unsecured lines of credit. Ideally, you should only use a second mortgage for debt consolidation if no other options are available. To find out more information, please do not hesitate to get in touch with the team at Your Rate Guy today.