You may have heard about second mortgages, which is a popular way to borrow against the equity of your home to pursue a renovation project, pay down other high-interest debts or avoid taking out another credit loan. Whatever the reasons, you should be aware of both the benefits and the risks associated with second mortgages and whether it’s the right loan option for you. Here we look at what is a second mortgage, and the advantages and disadvantages it provides.
What is a Second Mortgage?
This is another loan that uses your home as collateral. It sits behind your first mortgage in order of priority of payment. It’s also known as a home equity line of credit (HELOC) and is a great way to put the money you have built up in your monthly payments to use for other purposes.
What are the Advantages?
Higher Loan Amount
You can borrow a much larger amount of money than you would be able to do with other loans. This is because you’re securing your home as collateral, and this reduces the overall risk for the lenders. The amount you’re able to borrow will depend on various factors and will also depend on how much of your home’s value has been borrowed in your first mortgage.
Lower Interest Rates
The advantage of a second mortgage is that they have much lower interest rates than other types of loans. Credit cards and lines of credit can often have double-digit interest rates, making it unaffordable to take out large amounts of money at these rates when you already have a first mortgage.
Potential Tax Benefits
You may be able to get a deduction back for the interest you pay on your second mortgage. Talk to your tax accountant or mortgage broker to see what tax benefits you may be eligible for.
What are the Disadvantages?
When you take out a second mortgage you run the risk of home foreclosure if you cannot make the regular payments. Problems can arise if the second mortgage lender begins to feel as if you cannot make the payments that are required. This can run the risk of the lender taking your home through the foreclosure process. All the reason to have an affordable and obtainable payment plan in place.
With a second mortgage, there are also costs that you need to be aware of in obtaining the mortgage. Credit checks, appraisals, and other fees will need to be paid for, adding an extra expense to your loan payments. Knowing the costs in advance will help you to better plan for the total costs.
Talking to your Financial Forum mortgage broker should be your first move when considering a second mortgage. They have the expertise and know how to help you find the best options available for your financial situation.