What are the pros and cons of a second mortgage that borrowers need to be aware of?

• June 28, 2018

A second mortgage is a type of loan which allows you to borrow money against the value of the house, which is then to be used as collateral. There are various advantages and disadvantages of this type of mortgage, let us look at them here.

Pros of a Second Mortgage

Significant Loan Amount: You are in a position to borrow a large amount by taking a second mortgage. The amount you can borrow is usually up to eighty percent of the home’s value.

Lower Interest Rates: This type of mortgage usually has a lower rate compared to other types of loans. Since the loan is secured against your home, it reduces the risk lenders have to bear and helps bring down the interest rate.

If you compare the interest rate with unsecured personal loans like credit cards, the rates for second mortgages are generally single digit figures.

Become a Guarantor: In case you are assisting your kids in purchasing a house, then you may as well become a guarantor for their loan by taking a second mortgage on your house.

Avoid Refinance: It is possible that you have a fixed rate first mortgage with an associated high exit fees.

Similarly, you may be avoiding refinancing since the fixed rate you are getting is lower compared to the present variable rate. In both situations, a second mortgage will prove to be a viable option to borrow additional money.

Cons of a Second Mortgage

Higher Cost: These loans can be expensive since you will have to pay for many things such as appraisals, credit checks, origination fees, etc.

Moreover, closing costs may well be over thousands of dollars. Even if it is a no closing cost mortgage, you still be paying them, the difference is that you will not see it transparently.

Foreclosure Risk: If you are not able to make the payments then you will have to face the risk of foreclosure.