At times in life, you may need a certain amount of money to cover unexpected costs or costs that you might not be able to pay for without a cash infusion. When these things happen, a second mortgage can be very helpful. Before getting a second mortgage, though, you should understand how they work and what the pros and cons are.
A second mortgage is basically when you get another mortgage on your home on top of the one you already have. The property is used as security for this kind of loan. If you don't pay back the loan, the first mortgage will, of course, come first. Any money left over would be used to pay off the second mortgage.
People often take out second mortgages to pay for home improvements, buy a second or vacation home, or pay off other debts with a lower interest rate. You may also be able to use the money from your second mortgage for other things, but you should always remember that you are putting your home at risk for the purchase and make sure it is worth the risk.
The interest rate on a second mortgage is usually higher than the rate on your first mortgage. This is one of the biggest problems with getting a second mortgage. Lenders insist on higher interest rates because they know they won't be the first to get paid back if you don't pay back the loan. They need to protect their assets, so they do this by charging you more interest. The rates are, of course, usually lower than what you could get with any other type of loan and much lower than what you could get with a credit card.
You should also know that when you get a second mortgage, you'll usually have to pay some pretty big closing costs. If you can't pay those fees, you might not be able to get a second mortgage on your property.
Due to the amount of risk involved, you should only take out this kind of loan if you have no other choice. After all, you could lose your home, so you should be sure that you're willing to take the risk and that you can afford the extra loan payments.
If you decide that a second mortgage is the right choice for you, don't take the first rate you find. Instead, shop around. If you shop around, you might be able to get better terms or a lower interest rate.
Always read the terms to make sure you know what you'll have to pay. A common arrangement with many lenders of second mortgages is to include what is called "voluntary insurance" with your mortgage. Depending on how much insurance you already have, you might not need this extra coverage and cost. Also, make sure you know how much you're paying for closing costs like application fees, points to get a lower interest rate, and appraisal fees.
