What Are The Pros And Cons Of A Second Mortgage That Borrowers Should Be Aware Of?
A second mortgage is a type of credit that lets you borrow money against your home’s current value, which then can be used as collateral. There are several benefits and drawbacks of the second mortgage, which you can find in the section below:
Benefits of a second mortgage
A large loan: you will be able to borrow a decent amount of money by opting for a second mortgage. You can borrow a maximum of 80% of your total home value.
Lower Interest Rate: By opting for a second mortgage, you will enjoy a lower interest rate compared to other types of loans. Since the loan is secured by the value of your home, the lenders don’t bear high risk, which in turn allows them to offer the loan at a lower interest rate.
If you compare this loan with unsecured personal loans such as credit cards, the interest rate for the second mortgage usually turns out to be single digits.
Become a guarantor: If your children have taken a loan for buying a house, then you can become their guarantor by getting a second mortgage on your house.
Avoid Refinancing: You may have a fixed-rate first mortgage with high administrative charges.
If you are not interested in refinancing because of the new interest rate, which is lower than the current variable rate, then you will find the second mortgage to be very useful for borrowing additional money.
Disadvantages of a second mortgage
Higher cost: One of the most expensive types of loans, you should stay away from the second mortgage if you don’t want to pay for credit checks, appraisals, organization fees, and so on.
In addition, the charges for the balance of the case could well exceed thousands of dollars. Although this is a mortgage with no outstanding balance fees, you still pay them off, the difference is you won’t see them clearly and transparently.
The risk of penalties: if you are unable to make the repayments, you will have to bear the risk of foreclosure.
Types of Second Mortgages
While deciding on the second mortgage, you need to consider two main options. The most popular types of the second mortgage include home equity line of credit or closed-end second mortgage. Let’s find out more about these two options.
A home equity line of credit is basically a revolving line of credit that allows a homeowner to use the equity in his home to his advantage. The amount for this credit will be based on the percentage of appraisal value, which is between 75-85% of the home minus the balance remaining on the original mortgage. These types of loans are ideal for those who want to have a revolving credit line and those who feel secure in using their home as collateral to secure the loan.
As far as the difference between the home equity line of credit and the closed-end second mortgage is concerned, then the latter offers a fixed loan amount, which the borrower will repay over a fixed amount of time. Whereas homeowners can withdraw additional funds from the home equity line of credit in case, there is existing equity in the home. The closed-end second mortgage is excellent for those who need one-time funds.
Rest you can consult a professional mortgage broker to find out if the second mortgage really suits your case or will it be a damp squib.