Many people today inquire about taking out a second mortgage than they did in the past. It can help consolidate debt, be used to invest in property or a business, fund renovations, clear liens, etc. There are endless reasons to use a second mortgage because it is an equity loan. That means that the institution or private lender that is giving you a second mortgage is doing so because there is enough equity in the home to be considered a safe investment on their part.
The procedure of acquiring a second mortgage is less complicated than obtaining your first one or even a home line of credit if you are doing it through a major bank or A lender. Depending on the lender, there are usually fewer steps involved in securing a second mortgage. It can be the perfect way to pay for projects and goals without selling your property.
Some similarities between your first mortgage and your second mortgage are:
- Making monthly payments
- Terms and conditions about defaulting
- Must be closed by a real estate lawyer
When considering whether a second mortgage is right for you, think about how you will repay this loan. Depending on your situation, a second mortgage could be a good short-term solution but not the best long-term strategy. When considering a second mortgage, there are both advantages and disadvantages you should keep in mind.
Amount – Second mortgages let you borrow a significant amount of money since your home secures it. How much you can acquire will depend on your lender, but you could get up to 80% of the value of your home.
Interest rate – This type of mortgage typically has a lower interest rate than other types of loans. Rates are usually in the single digits unlike with personal loans like a credit card.
Tax breaks – You could be eligible for a deduction on the interest paid for a second mortgage. Ask the person that does your taxes before deducting anything.
Foreclosure – There is a risk of your home going into foreclosure if you stop making regular payments on a second mortgage. That is why you should not take out this type of loan if you will be using it for entertainment or standard living expenses. It is not a source of income that you can life indefinitely off of.
Cost – The fees associated with a second mortgage can add up. Credit checks, origination fees, and appraisals are all necessary but can cost quite a bit. Closing costs can sum up to thousands of dollars.
Interest – Second mortgage interest rates are lower than credit card interest rates but are usually a bit higher than the interest rate on your first mortgage. The longer you take to pay back your loan the more you will be paying in interest.
As with any important financial decision, you should weigh the pros and cons before making your choice to take on more debt. The professionals at Peak Mortgage Co. can help you make the right decision for your situation. Call us today to find out if a second mortgage is right for you.