Getting a Second Mortgage – Pros and Cons
A second mortgage, or home equity loan is a loan that comes that comes after the first mortgage. This means you'll have 2 mortgage payments each month! To the bank making the loan, this also means they are second in line to get paid if you default on your loans or your taxes. Rates on a second mortgage are usually higher than on a first mortgage.
Second Mortgage Rates
Just as the name implies, a fixed rate means your payment will stay the same for the life of your home equity loan. Loan terms are usually between 15 to 30 years. During this period, the interest rate on loan is fixed. For example, if you are given a mortgage at 4% interest, that rate will not change no matter what happens to mortgage rates.
While the fixed rates do not change, variable rates do change from time to time. The US has been a period of low mortgage rates and rate stability for some time. However, things can and do change. If you have a variable rate second mortgage and rates spike you may be stuck paying that higher rate. Plus, you won't be able to refinance into a lower rate as those rates will be higher too!
HELOC - Home Equity Line of Credit
The home equity line of credit is synonymous with a credit card as you repay the loan. The credit line revolves, and you get to use it again and again. Rates for a HELOC are almost always variable and slightly higher than with a traditional second mortgage. This type of loan takes a shorter time to repay between 5 to 20 years.
Pros of a Second Mortgage:
- If the second mortgage is used for hoem improvements it should be tax deductible. You should check with your tax preparer to determine if your home equity loan qualifies.
- Interest rates are lower compared to the those charged on other loans, for example, personal loans or credit cards.
- It can be quicker and easier to get. Many home equity loans can get done with just an e-appraisal saving you time and money.
Cons of a Second Mortgage
- Higher risk of foreclosure. If you are unable to pay your monthly premiums on time, then your lender can foreclose on your home.
- In case you want to refinance, the mortgage can be an obstacle. If you home value drops then you may not have enough equity to qualify for a refinance.
- Closing costs such as origination fees, title fees, and an appraisal can be expensive. However, most of these charges are negotiable.
- In many cases a cash out refinance can make more sense. You'll usually get a lower rate and you'll only have one payment to make each month.
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