What Is A Second Mortgage & Why Would You Need It?
A second mortgage is essentially an additional loan that’s taken out on your home or property that’s already mortgaged. Homeowners choose to do this for a variety of reasons, but is always comes down to needing a large sum of money to pay for something, be it home renovations or expensive fixes to the property. Since mortgage rates tend to have a lower interest rate than other forms of credit, like credit cards and car loans, some people choose to consolidate their debts by using a second mortgage to pay off everything else.
Homeowners with good credit and have at least 20% equity in their current home can often receive a home equity line of credit. These interest rates tend to be fairly low. Alternatively, homeowners with weaker credit can apply for a second mortgage through a private lender, but the interest rate is generally higher than that of a home equity line of credit.
What Risks Are Involved With Second Mortgages?
While taking out more debt is always risky for the consumer, it’s actually a higher risk factor for the lender. If the homeowner ever defaulted on their first mortgage payments and the home was repossessed, the lender of the first mortgage would be paid out first, whereas the second lender essentially gets whatever was left over to cover their loan.
Advantages Of A Second Mortgage
- Debt Consolidation – Second mortgages, be it home equity lines of credit or from private lenders, often carry a substantially smaller interest rate than credit cards, unsecured line of credits, car loans, etc.
- Cash — It’s a great way to pay for renovations or expensive fixes if you don’t have the cash on hand to fix them.
- Buying More Property – Whether you’re looking to extend your property line or buy another home, these loans can help front the cash to do it.
Disadvantages Of A Second Mortgage
As mentioned above, creating more debt for yourself is always risky. Interest rates will be higher than your initial mortgage, largely because it’s more risky for the lender to give you a second mortgage. There could also be higher fees on the second mortgage than the first, like application costs and appraisal fees.
What Factors Are Considered If I Apply For A Second Mortgage?
- Credit Score
- Equity & Property
- Current & Projected Market Conditions
If you’re thinking of getting a second mortgage, always give it plenty of thought and ask for advice and second opinions as much as possible. Consider all of your options before committing and get the help of industry professionals whenever you can.
For all of your Santa Cruz home needs, from refinancing to selling or renting, I can help. Send me a message online or give me a call at 800.226.4717 and I’ll be happy to help.