Taking out a second mortgage is a financial option for homeowners who have good credit, and are in good standing with the financial institutions that be. It is a move that allows you to get a relatively large loan, should the time arise when you need it. These loans can come in a single lump sum, such as a home equity loan, or can be treated like a fund to draw from, like an open-ended loan that lets you take more money out as you pay it off. Here’s some information about how a second mortgage can be both a benefit and a risk…
Use your home as collateral
What allows homeowners to qualify for these larger loans is that they can use the value of their house as collateral towards larger loans, at least the portion of the loans that they have paid off. Essentially, a second mortgage is possible because the leverage of the value that you own on a home tends to be quite large, and offers a secure foundation of value for banks and lenders to feel comfortable with getting their mortgage back. The drawback of this is that you will be paying back two separate mortgages (hence the term “second”).
Can be dangerous; use wisely
While it might sound very appealing to head out and take out a second mortgage for the purpose of gaining a good deal of short-term capital, this should be a method that is used very, very sparingly. Since the second mortgage is second in line, should you be unable to pay your debts and your home gets repossessed, the first mortgage is what will be paid off with the value of the home, while the second may not get fully paid off with the remainder. For this reason, second mortgages tend to have higher interest rates, since there is a bit higher of a degree of risk.
Don’t use home equity to pay off other debt
One of the absolute worst things that a homeowner could do with the value they have put into their home is use their home equity to get a loan to pay off other debt. This is an incredibly unwise decision, since the financial burden that a second mortgage can bring will often be more crippling than other forms of debt, and they tend to carry a high interest rate, as well.