Building up equity in your home is one of the advantages of owning property. Another benefit is being able to use the equity sooner rather than later. That is why some homeowners opt for a second mortgage, which allows them to access money for projects or other activities without having to sell their home.
What is a second mortgage?
A second mortgage is a loan that homeowners can apply for that uses the property as collateral. It can give a homeowner access to funds without having to sell their home. It is called a second mortgage because, in case of foreclosure, your first mortgage gets paid off before your second one. It gives your lender the right to put a lien on your home. This means that they have the right to seize your home if you default on the loan.
Types of Second Mortgages
Second mortgages can come in different types of loans, such as:
Home equity loans. With this type of second mortgage, you will only be able to use the loan money once. So, after it has been all spent, you’ll have no more loan to draw on.
Home equity lines of credit. This type of second mortgage is more of a revolving loan. It works like a line of credit by allowing you to draw out money, pay it down, and use it again and again.
The Benefits of Second Mortgages
Homeowners often consider second mortgages for a variety of reasons. A big attraction is that there are no restrictions on how the money can be used. Some homeowners use it for renovations or to pay off debt. There is no limit to where you can spend the money. There are some other benefits to taking out a second mortgage, including:
Lower interest rates. The interest rates on a second mortgage are often better than credit card rates. This makes a second mortgage an ideal solution to pay down credit card debt.
High loan amounts. Some lenders will allow you to take up to 90 percent of the equity out as a loan. If you have been making house payments for a long time, it can be a significant amount of money.
The Cons of Second Mortgages
While second mortgages offer homeowners an opportunity to access a large loan that they can use at their own discretion, there are downsides:
Double mortgage payment. When you take out a second loan on your home, you are agreeing to pay two monthly mortgage payments. This can put a lot of pressure on your budget, which increases the likelihood you’ll default on one of your mortgages.
More costly than refinancing. Second mortgages often come with higher interest rates than a refinance. This is because the lender of your first mortgage has more collateral in the property than the lender of your second mortgage.
If you are interested in learning more about second mortgages or you are wondering if it is the right option for you, call Northwood Mortgage™ at 888-492-3690 or contact us here.