Pros and Cons of a Second Mortgage
Aug 04, 2016 | Homeowner Advice
A second mortgage is simply a loan taken out after a first mortgage. It involves relatively the same application process as the first mortgage. Many people choose to take out a second mortgage when looking to consolidate debts, finance a home improvement project, or to make ends meet during a financial hardship. It is important to weigh the pros and the cons of a second mortgage before deciding what is right for your specific circumstance.
Second mortgages typically have loan terms of up to 20 years, however they can be as short as one year. The loan term of your second mortgage will most likely depend on the reason you are taking out a second mortgage. For example, if you are looking to consolidate debts, taking out a short-term loan could be hard to repay on time. A longer-term loan would allow the borrower to consolidate high-interest rate debts and save money in the long run.
Remember when you applied for your first mortgage? All of those fees and rules still apply to a second mortgage. Costs such as lending fees, interest rates, and APRs will all apply to a second mortgage. The application process is exactly the same as a first mortgage. Interest rates tend to be a bit higher on a second mortgage, as it is more of a risk for the lender.
Types of Loans
It is also important to look at the two types of second mortgages that may be taken out. These include:
- Home Equity Loan- Very similar to a typical mortgage.
- Home Equity Line of Credit- Works like a credit card. A HELOC allows the borrower to tap into a line of credit when they need it, based on the equity the borrower already has.
A Second Mortgage is Secured by Your Home
This means that if you fall behind on your payments, you could realistically lose your home. A second mortgage is a great way to finance a home improvement or pay off large debts, but it should not be taken lightly.
Have more questions about if a second mortgage is right for you? Contact Home Point Financial today to speak with a lending professional.