Some homeowners who are struggling with making ends meet consider a second mortgage. This is a basic overview of what a second mortgage is, who can qualify and if could fit your specific situation.
A second mortgage is basically exactly what it says – a second loan secured against your property. The “second” part of it means the loan does not have a priority on your home in the event of a default. Your first mortgage would get paid before any funds could be allocated to paying off the second one.
A second loan is typically a financing tool a homeowner obtains when they are in need of a large sum of money – more than credit cards or even a small savings account would not cover. Borrowing against the home allows the homeowner to secure a bigger loan at a better interest rate too.
Why people use second mortgages:
- Creating Home Equity Line Of Credit (HELOC)
- Debt Consolidation
- Home Improvements
- Avoiding Private Mortgage Insurance on First Mortgage
- Purchasing Second Home
While it is tempting to take out a second mortgage, you must remember a second mortgage is tied to your home and not paying it back would be devastating to your credit and you could lose your home. Another concern to consider is a second mortgage has a higher interest rate than first-ranking mortgages. Loan fees are also substantially higher.
Before you allow a second lien on your property, here are a few tips for selecting a second mortgage that is right for you:
- Ask for the annual percentage rate (APR). This is not the same as the interest rate – it’s higher because it includes the associated loan costs. Contact a few different lending organizations, including banks, credit unions and a mortgage broker. The interest rates can really vary.
- Keep an eye out for second mortgages that have severe penalties applied when you are late with a payment, as some loan interest rates can increase steeply.
- Check if there is any prepayment penalty for paying the entire balance off early. You don’t want a second mortgage forever and there should be some flexibility for when you want to pay off the balance.
- Read the fine print – is there a balloon payment? A lot of companies will advertise low, affordable payments, but fail to mention the huge balloon payment expected later on. Read your contract carefully!
