What’s a second mortgage and how do I get one?
What’s a second mortgage? Well, it’s all in the name. It’s a second mortgage on your home. Just like with your first mortgage, the second mortgage is secured by your property, meaning you can lose it if you don’t repay. However, if you default on your home loan payments, the original mortgage can be paid off by the sale of the home first before any money goes to the second mortgage. Second mortgages have seen a rise in popularity with interest rates declining and home values rising, so here’s everything you need to know about second mortgages and why they may or may not be for you.
Second mortgages are popular among people who want to undertake home improvement projects, send kids to college, pay debts, or make other large purchases.
WHY TAKE OUT A SECOND MORTGAGE?
The main advantage of a second mortgage is that it could potentially give you a lot of money that you can spend on basically whatever you want. This makes second mortgages popular among people who want to undertake home improvement projects, send kids to college, pay debts, or make other large purchases like buying a second home.
It goes without saying, but it’s generally not a great idea to use a second mortgage for frivolous spending because your home is at risk through the life of the loan. Second mortgages are also used when buying a home to avoid paying private mortgage insurance (PMI) if they aren’t able to provide a 20% down payment. This practice can save home buyers hundreds of dollars a month, but be careful to make sure that the total cost of the loan isn’t greater than the PMI.
WHY NOT TAKE OUT A SECOND MORTGAGE?
So what could be the downside of a bunch of new money? Well for one, the stakes are high. If you fall on hard times or for some reason aren’t able to repay the loan, you could lose your home. It’s important to budget and plan what you’re going to do with the money before you get it.
Another downside is the fees you’ll have to pay in order to secure the second mortgage. Interest rates and closing costs are usually higher than they were for your original mortgage, and the appraisal charge and legal fees can be a pain in the butt. However, if you’re prepared and have something worthwhile to pay for, the pros of taking out a second mortgage can outweigh the cons.
TYPES OF SECOND MORTGAGES
There are two main types of second mortgages: home equity loans and home equity lines of credit. Home equity loans provide a lump sum of money all at once that you repay at regular intervals over a set period of time. These loans typically have fixed interest rates. A home equity line of credit works like a credit card, so you can spend the money as you need it. Interest rates for home equity lines of credit are typically adjustable.
HOW DO I GET ONE?
It makes the most sense to go to your primary mortgage lender for a second mortgage loan. If your account is in good standing and your credit score is still good, taking out a second mortgage could prove to be an easy process and your lender will be able to combine both of your mortgage payments into one.
If you’re prepared and have something worthwhile to pay for, the pros of taking out a second mortgage can outweigh the cons.