Don’t you have certain financial obligations that must be settled on time? Whether it’s your child’s college fees, emergency repairs, or debt consolidation, certain expenses need to be paid as soon as possible. If you don’t have cash reserves on hand to meet such expenses, you may consider a second mortgage.
You may need access to a large amount of money for various reasons. If used for the appropriate purpose, a second mortgage can turn out to be a real financial savior. Possibly, you’ve already received a letter from your lender to take out a second mortgage. Many lenders invite borrowers to take a second mortgage to build wealth, renovate the house or pay for education. But what exactly the second mortgage is and why should consider taking it. Let’s find out!
What is a Second Mortgage?
A second mortgage is similar to your first mortgage. It is an additional loan that uses your home as collateral. This means that the lender allows you to borrow against the value of your home. Your purchase loan is considered as the first loan and this additional one is a second loan, also known as home equity lines of credit (HELOCs). Since your home is an asset, you can tap into your home’s equity. To understand how a second mortgage works, we need to delve into how home equity works.
When you take a mortgage, you don’t own the whole house until you pay off your mortgage. You keep paying monthly principal and interest amounts. Home equity is that portion of your house which equal to the amount you’ve paid.
Reasons to Get a Second Mortgage
People take out second mortgages for plenty of reasons. Here are some reasons why you may consider taking a second mortgage.
- To pay off another loan or debt
Some people take a second loan to pay off another debt such as student loans, credit cards, medical debt, or even their first mortgage. Also, it’s seen that a second mortgage is often used to pay off high-interest consumer debt. Almost every other average working American has a consumer debt. The average credit card interest rates are quite high and if you delay the payment, the rates go even higher. Despite the fact that the interest rate of the second mortgage is higher than the primary mortgage, people take out this loan. This is because the interest rate of the second mortgage is lower than the accrued interest on credit cards and personal loans. So, people take this mortgage to pay off high-interest consumer debt.
- Get Access to Funds Quickly
You may need a large sum of money quickly for several reasons. Maybe, your child wants to pursue higher education or you want to renovate your home. There is also a possibility of an unexpected tragedy or job loss that may leave you clueless. Whatever the situation may be, a second mortgage can give you quick cash until you’re back on your feet. People renovate their houses to increase their market value and thereby get more equity. As compared to an unsecured loan, a second mortgage provides liquidity to home equity at comparatively low rates.
- Avoid High Mortgage Penalties
Some people plan to sell the house and use that fund for investment capital. But prepaying the remaining balance of a mortgage loan may cost a high penalty. To avoid paying a high prepaying penalty, it’s better to take the second mortgage. The lending institutions impose a breakage fee on those who walk out of the contract before the term expires. Taking a second mortgage could be cheaper than paying high mortgage penalties.