Many homeowners will look for a second mortgage to cover expenses such as remodeling, college educations, debt consolidation or home additions. When considering a second mortgage it is important to identify the advantages and disadvantages.
The rates and accessibility on a second mortgage appear very appealing. Often borrowers can obtain a second mortgage easier than a home equity loan if they have bad credit, but the risk is much higher because you are exchanging a lien on your home for the loan. Also, interest rates can be much higher than a first mortgage, especially if you have a low credit score.
Another appealing feature is that second mortgages can be cheaper than most credit card advances, but if a borrower needs a large amount of money often credit card advances are not high enough, so if there is equity in the home a second mortgage may be the easier option. Many banks will offer a second mortgage on the property if there is equity in the property 10% or more.
There are also tax considerations when evaluating the potential for a second mortgage. A serious advantage is a tax deduction. Unlike other lines of credit such as a credit card, a borrower can deduct the interest from a second mortgage on their tax return.
With all things in life, there are typically not advantages to consider without considering the disadvantages. The main disadvantage is that a second mortgage is essentially a loan that is given in exchange as collateral for the home deed. If the borrower defaults on the second loan they may very well lose their home completely. Additionally, if they file bankruptcy, the first loan takes priority for repayment, making it very difficult to pay the second loan, again potentially losing the home completely.
Another consideration is that second loans require fees and closing costs, just like first mortgages. You may also be required to pay points. One point is equal to one percent of the loan value. This may not seem advantageous once the math is done.
If you are strapped for cash and into more than you can afford, you may end up with late mortgage payments. If this happens, you can end up paying hefty fees and inescapably affecting your credit report leaving it virtually impossible to dig yourself back out of the hole anytime soon.
A second mortgage inevitably more costly. It means more debt, more interest, and more risk. It is best to consider all the pros and cons and know exactly what to expect before making a decision with regards to getting a second mortgage.
