A second mortgage is another loan that has second priority behind your first mortgage. And just like your original mortgage, it uses your home as collateral. While it can be beneficial in many situations, it can also be a risk if not considered appropriately. Here we explore the advantages and risks you should consider and whether a second mortgage is the right choice for your financial situation.
Access Your Homes Equity
With a second mortgage, you can tap into your home’s equity. This allows you to put the equity you have grown from your home towards other projects and goals, like a home improvement.
Borrow a Large Amount
Since a second mortgage is secured against your home, lenders carry less risk and in turn, allow higher loan amounts than you would be able to obtain with other loan options.
Lower Interest Rates
Often second mortgages have lower interest rates compared to other debt options. And it can be a beneficial option if your credit rating has declined since you borrowed with your first mortgage. If you remortgage with the lower rating, you may end up paying more interest on the entire mortgage balance. A second mortgage would ensure you are only paying the interest on the amount you need to borrow.
Obtaining a secure or unsecured personal loan can be a challenge for those who are self-employed or between jobs. Second mortgages may prove easier to obtain as you are using your home and not your annual earnings as leverage.
You may consider consolidating your other high-interest loan amounts into a lower interest second mortgage. This allows you to pay off the amounts at the lower interest rates but should be used only when you know you can make the payments without issues.
Potential Foreclosure Risk
Lenders for your second mortgage are taking on more risk than those who own your first loan. If you stop your payments, the second mortgage lender has to wait until the first lender gets all their money back first. If the second mortgage lender believes you may not pay them at all, they can foreclose on your property and you can lose your home.
To avoid foreclosure and other financial problems, it’s important to fully understand your capabilities to repay your loans before you take out a second mortgage. Always seek professional advice from a mortgage advisor who can help you find the best options for your financial situation.