Applying for a second mortgage is no light decision because it is a loan that can take your home away from you if not paid back according to the terms you’ve agreed to. On the other hand, it allows you to access your equity without having to sell your home. With this in mind, it follows that a careful evaluation of the disadvantages and advantages of second mortgages can help you gauge whether a second mortgage is for you or not.
Types of Second Mortgages
Second mortgages come in a lump sum and a line of credit form. A standard second mortgage gives you your loan in a lump sum that you’ll have to gradually pay over time with fixed monthly payments. A line of credit or a HELOC (home equity line of credit), gives you a pool of money from which you can withdraw from as needed and repay and reborrow from over and over.
Understanding the types of second mortgages will give you more flexibility about deciding which type of home loan will be better suited for your needs. Know that interest rate will usually differ – with a line of creed usually being subject to variable interest rate and a standard second mortgage having a fixed interest rate that helps you plan your payments ahead.
Advantages of Second Mortgages
One of the key advantages of second mortgages is that they allow you to have access to large amounts of cash given that the loan is secured by your home. Other benefits include:
- Enjoy lower interest rate as compared to other types of loans because second mortgages are a type of secured loan.
- Tax deduction for interest paid (more so for pre-2018) if you qualify barring technicalities. This is still available this year but only applies to money spent on getting substantial improvements on your home.
Disadvantages of Second Mortgages
The risk of foreclosure is the biggest in the list of disadvantages of second mortgages but this generally only applies if you fail to continue making payments. Other disadvantages of second mortgages include:
- Second mortgages are not cheap. There are closing fees involved as well as you having to pay for appraisal, origination fees, and more.
- Interest cost can add up. Although a second mortgage’s interest is a lot less compared to credit card loans and the like, it is still a bit higher than your primary mortgage’s interest.
Best Uses of Second Mortgages
There are many uses of second mortgages but the best and wisest one is perhaps reinvesting the money back in the home by means of needed home improvement projects and upgrades. Debt consolidation is another smart use for a second mortgage because of the money saved in the long run. Funding education is another good use for the funds from a second mortgage as further education can drastically improve your earning potential.