How to Use a Home Second Mortgage
Why would somebody risk their home with a home second mortgage? These types of loans are appropriate for times when you need a lot of money. You may not have unlimited credit on your credit cards, and finding the cash just lying around is difficult.
Where is there a lot of equity or value? In the home. By borrowing against a home, borrowers can get bigger loans. In addition, second mortgages may allow for bigger loans because the lender considers a loan against the home to be safer.
Some common uses for second mortgages are:
• Home improvements
• Avoiding Private Mortgage Insurance (PMI)
• Debt Consolidation Programs
• Purchasing additional homes
• Creating a home equity line of credit (HELOC)
Most people use home second mortgages for other uses – and sometimes they are not wise uses. It can be tempting to tap a large source of money with a home second mortgage, but you have to remember that you’re borrowing against your home. In some cases, a home second mortgage is the only way to pay for a need.
Disadvantages of Home Second Mortgages
The main disadvantage with home second mortgages is that you are risking your home by using one. This is a serious risk: if you can’t pay the loan back, a home second mortgage can be catastrophic. Make sure that your intended use of funds is worth the risk you’re taking by using a second mortgage.
One of the drawbacks is that home second mortgages have slightly higher rates than senior mortgage rates. Its because the second mortgage won’t be paid until the first one is (in the event of a default). Because the loan is riskier than a plain mortgage, the rate is higher. One the other hand, the rate may be lower than alternative sources like credit cards.
Finally, you will have to pay hefty second mortgage fees. There are a lot of hoops to jump through and services to pay for. Depending on how much you need and how long you’ll need it, a home second mortgage may not work simply because of the fees.