Having a mortgage on your house is pretty routine, and you may even be considering adding a second mortgage. If you’re not sure about what you’ll be getting, though, it’s important to find out all you can before you make the decision to add to your debt load. So what is a second mortgage, and what kinds of pros and cons will you get with it? Your lender can give you specifics for your situation, which are very important, but here are the basic pros, cons, and pieces of information that you’ll need in order to make sure you get the right second mortgage. You may even decide it’s not a good choice for you, or that there are other options that work better, but that’s hard to do unless you’re well-informed about the situation.
1. What is a second mortgage?
A second mortgage is exactly what it sounds like: another mortgage on your property. You already have a first mortgage, which you generally just call your mortgage. When you get another one it takes second position. In other words, if you were to go bankrupt or stop paying your bills and were taken to court by your creditors, any money collected from you would go to pay your original mortgage first. If there was money left over, it would go toward your second mortgage. Because it’s not in the first spot and there’s a higher risk for the lender, a second mortgage can be a bit harder to qualify for. Still, it’s well worth doing if you have specific plans for the money and the ability to pay it without hardship.
2. How does a second mortgage work?
When you’re buying a home, getting a mortgage is just a normal part of the process. For a second mortgage, you already own the home. One thing you need to get that second mortgage is equity. Without it, there’s nothing to mortgage against and no lender will help you. It’s also important to have enough income to make the payment and to have good credit, but you won’t get anywhere without the equity. You may need to have an appraisal done on your home, and you will have to qualify for the loan just like you did with your first mortgage. Your second mortgage will also generally be smaller than your first mortgage because of the amount of equity you have. Within the confines of your equity and other qualifications, you can decide how big you want your second mortgage to be. Borrowing the maximum amount the lender will give you may not be a good choice or what you want to do.
3. What are the advantages to a second mortgage?
There are several advantages to a second mortgage. One of those is that you will have more money to do things you want to do. Many people get a second mortgage so they can go back to school, travel, or make improvements to their home. Others use it to pay off debt that’s at a higher interest rate or otherwise problematic. If you use a second mortgage wisely, it can be a good way to make changes in your life that you feel are very important, and you can make those changes for a relatively low interest rate. The lower the rate of interest the better for the borrower, so consider that carefully when you’re about to get a second mortgage. If the interest rate is too high, the mortgage may not be in your best interest.
4. What are the disadvantages?
The biggest disadvantage to a second mortgage is that you’re putting your home at higher risk. Losing your home would be devastating, and the more you have mortgaged against it the higher the chances that you’ll lose it if you have a significant financial problem that causes you to get behind on your payments. Another disadvantage is that you’ll simply owe more money, which might not be something you feel good about. When you owe a lot of money you can feel burdened with payments and financial stress, and a second mortgage can feel overwhelming. Even if you use the money to do all the things you had planned to do with it, you can still regret the fact that you have that payment to make every month for a number of years. Keep that in mind before you choose a second mortgage, so you can make the right financial decision for your needs.
5. Where can you find a second mortgage?
When making a home purchase there seem to be lenders everywhere. It may be a little bit harder to find one that will do a second mortgage for you. While most lenders do provide these, the qualification requirements for them may be more severe than for a first mortgage. Talk with the lender you already have for your mortgage to see what kinds of options they may offer. Even if what they’re offering you sounds good, it’s always best to check with a couple of other lenders, as well. You may find that a different lender will offer you something that’s even better, and that gives you more financial peace of mind as you seek out a second mortgage.
